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Virginia Partnership to Encourage Responsible Lending Predatory Lending: The Problem and the Plea Helen O’Beirne, Responsible Lending Coordinator Predatory Lending - A Moral Issue Target: Low-income workers Minorities and immigrants Women, single mothers receiving benefits Elderly Military families College students Attributes = young or very old, desperate, clustered, unbanked, financially immature Signs of Predation Triple Digit Interest Rates (300% – 1000%) Collecting Interest From the Loan Proceeds No Refund For Early Pay Back Single Balloon Payment Short Term Loan – Typically 14 days Personal Check as Collateral No Consideration of Ability to Repay Loans are Flipped, Rolled or Refinanced Simultaneous Borrowing from Multiple Lenders Mandatory Arbitration Clause Source: Center for Responsible Lending http://www.responsiblelending.org Triple Digit Interest Rates Payday Loans = 380 to 790% APR Car Title Loans = 360% APR Loansharking = 150 to 250% APR Pawnshops = 18 to 300% APR Payday Loan Contract Usury laws have existed for hundreds of years “Protect the Needy from the Greedy” Bans the charge of interest to the poor. Exodus 22:25 "He who increases his wealth by excessive interest gathers it for one who has pity on the poor." Proverbs 28:8 Single Balloon Payment Full amount DUE at end of loan term Installment or partial payments are prohibited Have you ever taken out a loan that you had to pay back in one fell swoop? What is the likelihood that a traditional fringe borrower can repay all at once? DEBT TRAP “[Predatory loans] are set up so you have to pay the whole thing off in two weeks, and they know you can’t. It’s bad enough that the interest rates are 380 percent, the worst part is that they trap you”. Jay Speer, Executive Director – Virginia Poverty Law Center Loans are Flipped, Rolled or Refinanced Typical borrower lives from payday to payday and come up short when loan is due To avoid default (and have their check presented for payment) the borrower… Flips, rolls or refinances the loan by paying interest again, and again, and again, and again… DEBT TRAP “That’s the Dirty Little Secret” Payday lending is structured so you just pay the interest every two weeks. They never want you to pay back the principal. John Oxendine, Georgia Insurance Commissioner Simultaneous Borrowing from Multiple Lenders “Borrowing from Peter to pay Paul!” Exorbitant interest payments eats into borrower’s paycheck After a couple of touch ‘n go’s, borrower needs another loan to fill hole caused by first loans’ interest payments Can continue for months or years Some borrowers have upwards of 13 outstanding loans Forms of Predatory Lending Payday Loans Car title loans Predatory mortgage lending Rent-to-own stores Refund anticipation loans Buy here, pay here auto dealers Pawn shops Payday Lending – The Problem Bad check as collateral for up to $500 $15 fee for every $100 loaned Average loan is $300 Average term is 2 weeks = $45 every 2 weeks in INTEREST in 3 months (6 pay periods), already paid back amount over the original loan! BUT NO PRINCIPAL DEBT TRAP Payday Loan Tracker Date Interest Paid Oct 1 $45 Original Loan Oct 15 $90 = $300 Nov 1 $135 Nov 15 $180 Dec 1 $225 Dec 15 $270 Remaining Jan 1 Principal $315 = $300 Payday Lending – Other Problems Hold checking account hostage Collection practices Threat of lawsuit Shame How Did This Happen? Payday Loan Act of 2002 Loophole / exception / special exemption Can accept “bad” check Can charge exorbitant interest LEGITIMIZED AND LEGALIZED INDUSTRY Payday Statistics 12/31/2002 12/31/2003 12/31/2004 12/31/05 6/6/2006 Total number of locations 377 596 696 756 776 % Increase from 58 17 9 3 previous year Total dollar amount of payday loans made $165,659,916 $655,645,430 $988,135,464 $1,197,105,829 % Increase from 296 51 21 previous year Total number of individuals to whom 124,362 285,798 387,696 445,891 payday loans were made % Increase from 130 36 15 previous year Number of individuals who received 13 loans 50,928 76,068 90,859 or more % Increase from 49 19 previous year Payday Lenders in Tidewater Locality Payday Lending Storefronts Virginia Beach 69 Norfolk 45 Newport News 40 Chesapeake 30 Portsmouth 28 Hampton 27 Source: Bureau of Financial Institutions – licensed payday lenders as of 8/06. Other lenders get word of lenient restrictions for payday loans in Virginia (industry friendly state)… Realize they could make a buck, too! Car Title Lending – The Problem Payday lending’s little brother 25% “fee” up front; tacked onto principal 25% fee per month = 360% APR ON A SECURED LOAN (they have title and extra set of keys) Repossession = loss of vital asset How Did This Happen Loophole = “motor vehicle equity line of credit” No caps on open-ended loans (meant for credit cards) All other small loans capped at 36% APR via the Consumer Finance Act Industry hoping to be regulated = NEXT PAYDAY LENDING CRISIS Car Title Statistics Currently unregulated Estimated 150 locations Could be us: Tennessee passed car title authorizing legislation and there are now over 900 car title lenders in Tennessee. In 2004, Tennessee car title lenders repossessed 17,313 cars. Three lawsuits settled secretly Stories Ms. C is 58, disabled, lives on a meager $1019 per month in Social Security. She now has outstanding payday loans with 5 companies and pays $400 a month just to keep them afloat. Every two weeks, she renews one to pay another. Ms. C finds it takes almost an entire day to visit each lender with a modest payment. A payday collector yesterday told her on the phone that someone who didn't pay ended up downtown in jail. Ms. C is terrified that she will spend the last years of her life behind bars. Stories A recent client (VPLC) was discovered to have 5 outstanding loans: one for $500, another for $345, another for $230 and 2 for $115 each. She gets a monthly social security check of $626. She borrowed money because she was temporarily taking care of her granddaughter and needed money for the related expenses. Stories Janet Ruiz borrowed $2,950 in February, 2005 and was charged a cash advance fee of $737.50. Her monthly payments (interest only) were $1,106.25. By the end of the year, she owed more than $12,500. By April, 2006, her debt hit $16,000. Stories - Stress “I have been a nervous wreck for 2 days and have cried my eyes out. The thoughts of going to jail--almost made me suicidal thinking if I was dead my daughter could draw my social security. This threat was a real threat to my entire life you see. Please don't think I am suicidal--but it made me think what if someone that was not stable was in this situation thinking they would go to jail? Somebody else might go through with it.” VaPERL Virginia Partnership to Encourage Responsible Lending member organizations include: AARP, Virginia Poverty Law Center, Virginia Interfaith Center for Public Policy, Housing Opportunities Made Equal, Richmond Better Business Bureau, CHIP of Virginia, Legal Aid Justice Center, Virginia Organizing Project, Virginia Citizens Consumer Council, NAACP Virginia State Conference, Piedmont Housing Alliance, Virginia Muslim Coalition for Public Affairs, Peninsula Community Development Corporation, New River Community Action, Greene County Alliance of Church and Community Efforts (GRACE), Virginia Area Agencies on Aging (V4A), Voices for Virginia’s Children, Tidewater Sowers of Justice, and others. VaPERL at the GA – The Plea Repeal the Payday Loan Act of 2002 Delegate O’Bannon’s HB 619 Undo special exception for industry Avoid passing loose reforms (HB 1621) Cap car title loan APRs at 36% Delegate Morgan’s HB 325 Close loophole to open-ended credit Avoid codifying current practice (HB 1514) Challenges They say… Legitimate need fulfilled No alternatives Personal responsibility Lost revenue Free market Compromise Reforms not repeal Countdown to Dec 5th House Commerce & Labor Committee will vote on HB 619 & HB 325 Call, write, and email your legislators and members of the C&L Committee NOW! Delegates in your area: Alexander, Purkey, Suit, Joannou, Melvin, Morgan, Tata Join VaPERL listserv for more information: www.VirginiaFairLoans.org “Payday lending is like any other vice – it’s instant gratification, but it’s a bad deal over the long term. There are not adequate limitations to protect against gross abuse. People in financial crisis need financial counseling, not a quick fix. Not a loan that is financial cocaine.” Bill Whalen, Senior Staff Attorney, Pisgah Legal Services, Ashville, N.C. THANK YOU FOR YOUR ATTENTION AND INTEREST (the good kind)! ANY QUESTIONS?