Predatory Lending: A Virus We Can Eliminate
By: Ellen Schloemer, Center for Responsible Lending
Predatory lending costs American families more than $25 billion every year.
Driving down Bragg Boulevard in Fayetteville, North Carolina, home of the world's largest Army base, it's hard to miss all the alluring signs advertising fast cash.
Among the bars and tattoo parlors, there's a generous sprinkling of payday lenders who specialize in doling out small loans in return for big fees and triple-digit interest payments.
These lenders "serve" a steady stream of soldiers, African-Americans and single mothers.
When any customer enters a payday shop, it's likely he or she is a regular.
Ninety-nine percent of payday loans go to repeat borrowers.
Payday shops are designed to keep people in debt, a business model we call "the debt trap."
A person strapped for cash pays back, on average, $800 for a $325 loan.
In North Carolina, payday stores aren't even supposed to be here.
In 2001, state lawmakers recognized that payday loans do much more harm than good, and they banned them.
So what are payday lenders doing in Fayetteville and all over my state?
Like a nasty virus, they seem to regroup and multiply every time they encounter an obstacle.
By "renting" a bank's charter, payday lenders avoid usury limits in the states where they operate - thumbing their noses at the intentions of state lawmakers and continuing to take hard-earned dollars from people who don't have any dollars to spare.
This circumvention of state law seems particularly brazen in North Carolina, where we have taken a lead in fighting other types of predatory lending.
This is a relatively low-wealth state; in 2003, the median 4-person household income was about $57,000, ranking North Carolina 36th in the nation.
Predatory mortgage lending encompasses an array of abusive practices among subprime lenders, who offer mortgages to people with credit problems.
We at the Center for Responsible Lending (CRL) estimate that predatory mortgage lending nationwide costs consumers at least $9.1 billion every year.
North Carolina was a pioneer in recognizing the problem of predatory mortgage lending and doing something about it.
A study by the University of North Carolina showed that North Carolina's predatory lending law curbed harmful lending, and CRL estimates that North Carolina borrowers saved $100 million during the first year alone.
Since then, more than 20 other states have followed suit by passing similar laws against predatory mortgage lending.
Critics from the subprime industry predicted that state laws would prevent borrowers from getting access to credit but, in fact, that hasn't been the case at all.
This year Representatives Ney (R-Ohio) and Kanjorski (D-Pennsylvania) introduced an industry-friendly bill that would override state laws, create loopholes and exceptions that would encourage more abusive loans, and in some instances actually weaken existing federal law.
If this bill is passed, predatory lenders will no longer have to worry about pesky state laws - but families will be fair game for unscrupulous lenders.
Other "innovations" include title loans, overdraft lending and refund anticipation loans.
Overdraft loans also are similar to payday loans, commonly charging triple-digit interest rates and trapping families in high-cost debt.
And refund anticipation loans, though they don't create a debt trap, take a huge chunk of a low-income borrower's much-needed tax refund.
We have the tools to combat it: sensible laws that require lending policies to help families rather than harm them.
Summarized by Copernic Summarizer