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Predatory Lending Practices & How to Avoid Them
https://learn.extension.org/events/2113
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587.
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Presenters
Marcus Beauregard, Colonel, USAF (Retired) is the Chief of the DoD-State Liaison Office (DSLO) within the Office of the Deputy Assistant Secretary of Defense for Military Community and Family Policy. Together with a Senior Liaison and 8 Regional Liaisons, he works with state governments on a slate of key issues important to Service members and their families. Additionally, he is one of two individuals responsible for the Military Lending Act and updating the DoD regulation required to implement the law.
Dr. Barbara O’Neill, financial resource management specialist for Rutgers Cooperative Extension, has been a professor, financial educator, and author for 35 years. She has written over 1,500 consumer newspaper articles and over 125 articles for academic journals, conference proceedings, and other professional publications. She is a certified financial planner (CFP®), chartered retirement planning counselor (CRPC®), accredited financial counselor (AFC), certified housing counselor (CHC), and certified financial educator (CFEd).
Predatory Lending Practices and How to Avoid Them
https://learn.extension.org/ events/2113
Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension
Webinar Objectives • Provide a definition of predatory lending
• Identify red flags of predatory lending
• Discuss types of high-cost consumer loans
• Describe subprime lending
• Provide resources for further information
Military Consumer Protection Day is Annually in July
More About Military Consumer Protection Day
Military Consumer Protection Day (MCPD) is a joint initiative to empower active duty and retired service members, military families, veterans, and civilians in the military community. MCPD provides free resources as the first line of defense against fraud and to help people make better-informed decisions when managing your money. http://www.military.ncpw.gov/
Question #1 What predatory lending practices concern you and your clients the most?
What is Predatory Lending? • High interest loans
• Outrageous fees
• High-pressure salespeople
• Unaffordable repayment terms
• Harassing collection tactics
• Deceptive advertisements and practices
https://www.debt.org/credit/predatory-lending/
Target Populations for Predatory Loan Fraud
• Vulnerable consumers (e.g., the elderly)
• Young consumers (e.g., new service members)
• People needing immediate cash
• People with weak credit records
• People living beyond their means
• People with limited education and/or income
Formal Definition of Predatory Lending
“Extending credit to a consumer when, based on the consumer’s current and expected income, he or she will be unable to make scheduled payments to repay the obligation.” Reference: U.S. Truth in Lending Act
http://banking-law.lawyers.com/consumer-banking/predatory-lending.html https://www.law.cornell.edu/wex/dodd-frank_title_XIV http://www.occ.gov/topics/consumer-protection/fair-lending/index-fair-lending.html
Predatory Mortgages • Frequent refinancing
• High debt service-to-income ratio
• High loan-to-value ratio
• “Reverse redlining”
• Loan “packing”
• Deceptive sales practices
Question #2 Have you had any clients who have had predatory home mortgages or heard any horror stories about them?
Other Predatory Lending Practices
• Paycheck loans
• Pawnshop loans
• Car title loans
• Rent to own plans
• Advanced fee loan scams
• “Credit repair” companies
Payday Loans Have Lots of Names
• Payday loans
• Cash advance loans
• Check advance loans
• Post-dated check loans
• Quick cash loans
• Video: https://www.youtube.com/watch?v=0lnXz14Uoi4
How Payday Loans Work • Borrow against next paycheck
• Write a post-dated check to lender
• Amount paid = loan + lender’s fee
• Fee = percentage of check amount
• Payday loans typically last two weeks
• Check is not cashed for up to 14 days
http://www.consumer.ftc.gov/articles/0097-payday-loans
Costs of Payday Loans • Typical charge: $15 to $20 per $100 loan
• Write $115 check to borrow $100
• Loan good for up to 14 days
• $15 finance charge = 390% APR (2 weeks):
• At next payday, borrower has two choices: – “Redeem” the check with $115 cash or have lender deposit it
– Extend the loan with another fee
http://www.paydayloaninfo.org/
Payday Loan Roll-Overs • Three roll-overs: costs $60 to borrow $100
($15 x 4)
• Six roll-overs: finance charge = $105 ($15 x 7)
• Finance charge can become greater than the amount borrowed!
http://www.paydayloaninfo.org/facts
http://www.paydayloaninfo.org/state-information
More About Payday Loan Costs • Payday lenders often call their charges “fees”
• Avoid state usury laws
• Loan cost is just like interest
• Even small fees add up
• 20% biweekly = $520% year (20 x 26)
True Story • Hospital cafeteria worker earning $16,000
• Needed $200 to pay bills
• Paid $38 fee to borrow $200
• Next payday: did not have the money
• A year later: paid $1,220 in fees
• Still owed the $200
Alternatives to Payday Loans • Small consumer loans
• Payment plan with creditors
• Advances from employers
• Emergency assistance programs
• Credit union loans
• Cash advances on credit cards http://www.responsiblelending.org/payday-lending/tools-resources/
alternatives-to-payday-loans.html
Car Title Loans • Give lender your car title to get a loan
• If you can’t repay, car is repossessed
• Lender keeps amount that car sells for
• Example: – Your car is worth $2,500 – You owe the lender $1,000 – Lender pockets a $1,500 profit
https://www.consumer.gov/articles/1013-car-title-loans
More About Car Title Loans • Loan usually 25% to 35% of car’s value
– Example: borrow $700 on a $2,500 car
• Interest rates are high: 20% + (for 30 days)
• Lenders usually require clear title (no loans)
• Therefore, cars tend to be older, but decent
• Lender takes a key as well as title
http://www.responsiblelending.org/other-consumer-loans/car-title-loans/
Pros and Cons of Car Title Loans
Pros – No credit check
– Few personal questions are asked
– You keep your car
– Short wait for the money
Cons – High interest charges
– Easy for lender to repossess car
– Could lose equity in car (car value- amount owed) if lender takes it
If someone wants to get a car title loan, advise them to try to pay it off within 30 days with expected income OR seek alternative cash sources
Tax Refund Anticipation Loans
• Expensive way to borrow money
• Can end up spending > 10% of refund to get money a few days sooner with RALs
• RALs (loans) and RACs (high-fee checks)
• Better options: VITA or AARP Tax-Aide assistance, e-file and request direct deposit
http://www.responsiblelending.org/other-consumer-loans/refund-anticipation-loans/
Check-Cashing Outlets • Charge high fees to cash checks
• Government, payroll, or personal checks
• May charge as much as $25 to cash $500 Social Security check
• Can cost hundreds of dollars annually
• Many also sell high-cost money orders
http://www.dollarsandsense.org/archives/2015/0115barr-figart.html
More About Check Cashing Outlets
• Charge from 1% to 20% of check amount
• Average cost: between 2% and 6%
• Personal checks: usually have highest fees
• Appeal to “unbanked” households
• One of fastest-growing financial services
• One study: $396 annual cost to cash checks and get 6 money orders per month
Good Alternatives to Check-Cashing Outlets
• State-mandated accounts for LMI persons (e.g., Consumer Checking accounts in NJ): http://www.state.nj.us/dobi/division_consumers/pdf/checkinga.pdf
• Credit union at work or church
• Electronic Transfer Accounts (ETAs)
• Supermarkets for cashing personal checks
• Other?
Advanced-Fee Loan Scams • Ads say “Loans by Phone- No Questions”
• Tell people to call a 900 (toll) number
• Call could cost $100 or more
• Key message….Don’t borrow if:
– you have to pay fees up front
– you don’t know the lender
– you do not get loan terms in writing
http://www.consumer.ftc.gov/articles/0078-advance-fee-loans
Basics of Pawnshop Loans • Bring item to be pawned to the shop
• Receive pawn ticket that must state:
– Terms of the loan contract
– Customer’s name and address
– Description of pledged item with serial numbers
– Amount lent
– Maturity date
– Amount to be repaid to redeem the pledged item
http://www.nolo.com/legal-encyclopedia/disadvantages-pawnshop-loans.html
Typical Items Pawned • Watches and jewelry
• Televisions
• Audio and video equipment
• Musical instruments
• Camera equipment
• Firearms
http://www.nationalpawnbrokers.org/2012/6-things-everyone-should-know-before-going-to-a-pawn-shop/
Pawnshop Loan Defaults • Collateral becomes property of pawnshop
– Usually after a grace period of 1-3 months
• Most states require the broker to notify the customer
• Surplus is supposed to be returned to customer
– Rarely happens in practice
• Default rates range from 14% to 22%
http://www.bankrate.com/finance/personal-finance/pawnshop-101-what-you-need-to-know-1.aspx
High Interest Rates • At first, the cost seems low
• When taken as an APR, it can be as high as 240%
• Many pawnbrokers also charge storage and insurance fees
• Average loan of $75- $100 – Typically 25% to 60% of item’s resale value
http://www.nolo.com/legal-encyclopedia/disadvantages-pawnshop-loans.html
Rent-to-Own Basics • Self-renewing monthly or weekly lease
• Choice at the end of each rental period
– Continue with the lease
• Make the next payment
– Return the merchandise
• No future payments on item
• Time period usually 18 to 24 months
http://www.consumer.ftc.gov/articles/0524-rent-own-costly-convenience
Types of Merchandise • Home Electronics
• Computer equipment
• Furniture
• Appliances
• Jewelry
http://www.bbb.org/blog/2013/11/the-pros-and-cons-of-rent-to-own-furniture/
Reasons Why People Use Rent-to-Own Stores • Low weekly or monthly payments
• No down payment
• No credit check
• Quick access to goods
Pitfalls of Rent-to-Own Stores
• Extremely high cost way to buy things – Typically 3 to 4 times cash purchase price
• Can get a used item – While paying for a “new” item
• Possible repossession
• Little regulation to protect consumers
Rent-to-Own vs. Credit Contracts
Rent-to-Own – Leasing/renting item
– Paying for its use
– When finished using, don’t have to pay any more
– If all payments are made, customer will own the item
Credit Contracts – Purchasing an item – Monthly payments – Spells out the annual
percentage rate (APR) and finance charge
– States cash price, monthly payments, finance charges and number of payments
– Ownership when all payments are made
Comparison of Color-TV “Purchase” Options
Store
Payment Amt
# of Payments
Total Cost
Who Makes Repairs
Rent-to-Own
$13.00/week 78 $1,014 Read Contract
Installment Sale @ 19.8% APR
$16.00/Month 18 $291.06* You Do
Cash Sale $250.00 1 $250.00* You Do
*Sales tax not included Source: Consumers League of New Jersey
How Quickly Fees Add Up Weekly Rental $13.00 x 78 weeks $1,014.00Sales Tax $0.78 x 78 weeks $60.84Optional Coverage $1.00 x 78 weeks $78.00Delivery Fee $10.00 x 1 $10.002 Late Fees $3.00 x 2 $6.00Picked up because behind on Payment $10.00 x 1 $10.00Reinstatement Fee $5.00 x 1 $5.00Redelivery $10.00 x 1 $10.00Total $1,193.84 For initial value of $250.00, you have spent an additional $943.84
Source: Annetta Jones, Reality of Renting to Own, Purdue Cooperative Extension Service
Cheaper Purchase Options • Save the $14 a week to purchase TV
• Purchase the TV on a bankcard
– Make payments equal to $14/week
• Purchase the TV on a store credit card
– Make payments equal to $14/week
• Ask the question:
– “Do I really need this item?”
Question #3 Have you had any clients who have had predatory non-mortgage loans? Describe what happened.
Subprime Lending • Lending to consumers
– with “blemished” credit records (low credit scores)
– with high debt levels
– with no credit history
– who don’t qualify for conventional loans
• Borrowers pay high interest rates and fees
• About 30% of U.S. population is subprime
https://research.stlouisfed.org/publications/es/07/ES0713.pdf
Characteristics of Subprime Loans
• Wide variety of lending practices, including
– interest rates 1% - 4% more than prime loans
– high-cost loans at triple-digit APRs
• Includes borrowers at all income levels
• Risk-based pricing (tiers)
• People with poor credit histories
• Some subprime lenders are owned by banks http://www.consumer-action.org/downloads/english/Subprime_Manual.pdf
Subprime Lending Includes All Types of Debt • Home mortgages and refinancing
• Home equity loans
• Credit cards
• Car loans Common Characteristics: Different prices (tiers) for borrowers based on credit scores and marketing to low-rated consumers to increase lender profits
http://www.wsj.com/articles/lenders-step-up-financing-to-subprime-borrowers-1424296649
Avoid Lenders Who…..
• Tell you to falsify information
• Pressure you to borrow more than needed
• Offer bigger loans than you can afford
• Fail to disclose loan terms
• Tell you to sign blank forms
• Won’t give you copies of signed documents
Key Take-Aways • People can’t borrow their way out of debt
• Most lenders are reputable and fair
• Predatory loan interest and fees are outrageous
• Fees can sometimes exceed the amount borrowed
• Vulnerable consumers are a target market
• Lower-cost borrowing alternatives are available
• Shop around for loan terms, interest rates
• If a loan sounds too good to be true, it probably is
Key Take-Away Applications
• Explain the pitfalls of excessive debt (videos, etc.)
• Do math calculations to highlight high loan costs
• Show rollover costs can exceed loan amounts
• Present lower-cost alternatives to predatory loans
• Teach people the “Rule of 3” to compare loan terms
• Teach people to be skeptical of exceptional deals
The Military Lending Act
Objectives • Describe MLA protections • Define the types of credit covered • Describe how the revised rule works • Provide important points for consumers
Military Lending Act
• What and who are covered • Limits, restrictions and prohibitions • Disclosures • DoD rulemaking • Consequences • Relation to other laws
What and Who are Covered
• What: Credit as defined by DoD, does not include: – Mortgages – “Purchase money” loans, like car loans
• Who: – Active duty Service members, to include reservists on
active duty 30 or more days – Their family members included in DEERS
Limits/Restrictions/Prohibitions • Limit: 36% APR, to include all fees (as defined
by DoD) and sale of credit products at time of loan.
• Restrictions: – Refinancing – Use of checks, bank accounts and vehicle titles – Use of allotments – Prepayment penalties
• Prohibitions: – Waive SCRA rights – Mandatory arbitration or onerous legal notice
Disclosures
• Military APR • Truth in Lending Act disclosures • Must be provided in writing and orally
DoD Rulemaking • To define: credit, creditor, fees • Define with regulatory agencies:
– Consumer Financial Protection Bureau – Department of Treasury – Federal Deposit Insurance Corporation – Federal Reserve Board – Federal Trade Commission – National Credit Union Administration – Office of the Comptroller of the Currency
• Review every two years
Consequences If Violated
• Loan null and void • Borrower has private right of action • Includes provision for punitive damages • Possibility for criminal consequences
Relation to Other Laws
• Takes precedence over state law unless state law provides better protection
• State laws apply to active duty Service members and families residing in the state, regardless of legal residence status
DoD Rule • Credit and creditors covered • Exemptions to Military APR • Exceptions to restrictions • Disclosures • Creditor responsibilities • Effective and compliance dates
Coverage
• Credit: All credit defined by the Truth in Lending Act (except for exclusions in the law) – 2007 rule only included limited definitions of payday,
vehicle title and tax refund anticipation loans – 2015 rule includes all payday, vehicle title and tax
refund anticipation loans, pawn loans, installment loans, open-end lines of credit and credit cards
• Creditors: All creditors and their agents
Exemptions to MAPR
• For credit cards: fees that meet “bona fide” and “reasonable” criteria
• For small dollar loans: – Fee of no more than $20, once per year – For loans made under a rules established by a federal
regulator and an interest cap established in federal law
Exceptions to Restrictions
• Refinancing restriction limited to payday loans • Bank accounts can be used to secure loans that
have a MAPR no greater than 36% • Vehicle titles can be used by depositories to
secure loans • Allotments can be used by Relief Societies to
secure loans
Disclosures
• MAPR can be described in contract disclosures rather than disclosed as a calculated amount
• Restriction on mandatory arbitration for covered borrowers can be included in contract disclosures
• Oral disclosures can be accommodated by providing a toll free number
Creditor Responsibilities
• Offer credit that complies with the rule; or • Satisfy their need for compliance by identifying
the covered borrower – Creditors is granted a safe harbor if they use the
DMDC database or one of the credit reporting agencies
– Creditors can use their own system to verify whether a client is a covered borrower
• Borrower is not required to self-identify or affirm status for the creditor
Effective and Compliance Dates
• Date published: July 21, 2015 • Effective date: October 1, 2015 • Compliance date:
– For credit other than credit cards: October 3, 2016 – For credit cards: October 3, 2017
Key Points for Consumers • The MLA doesn’t cover all predatory lending • The creditor identifies the covered borrower • The MLA is about restrictions, not disclosures • The restrictions don’t limit good credit options • People can’t borrow their way out of debt
For follow-up information and questions: Ø Dr. Barbara O’Neill:[email protected] or @moneytalk1 on Twitter Ø Marcus Beauregard: [email protected]
Evaluation and CE Credit The Personal Finance Concentration Areas team will offer 1.5 credit hour(s) from AFCPE for AFC-credentialed participants and 1.5 general CEUs for FinCert certified CPFCs.
To receive CE credit please complete the evaluation and post-test found at: https://vte.co1.qualtrics.com/jfe/form/SV_2uALc8AGkJlYcXb *Must pass post-test with an 80% or higher to receive certificate.
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587.
