Predatory Lending:Predatory Lending:The Problem and the PleaThe Problem and the Plea

Virginia Partnership to Encourage Virginia Partnership to Encourage Responsible LendingResponsible Lending

Helen O’Beirne, Responsible Lending Coordinator

Predatory Lending - A Moral IssuePredatory Lending - A Moral Issue

Target:Target: Low-income workersLow-income workers Minorities and immigrantsMinorities and immigrants Women, single mothers receiving benefitsWomen, single mothers receiving benefits ElderlyElderly Military familiesMilitary families College studentsCollege students

Attributes = young or very old, desperate, Attributes = young or very old, desperate, clustered, unbanked, financially immatureclustered, unbanked, financially immature

Signs of PredationSigns of Predation

Triple Digit Interest Rates (300% – 1000%)Triple Digit Interest Rates (300% – 1000%)Collecting Interest From the Loan Proceeds Collecting Interest From the Loan Proceeds No Refund For Early Pay BackNo Refund For Early Pay BackSingle Balloon PaymentSingle Balloon PaymentShort Term Loan – Typically 14 daysShort Term Loan – Typically 14 daysPersonal Check as CollateralPersonal Check as CollateralNo Consideration of Ability to RepayNo Consideration of Ability to Repay Loans are Flipped, Rolled or RefinancedLoans are Flipped, Rolled or Refinanced Simultaneous Borrowing from Multiple LendersSimultaneous Borrowing from Multiple LendersMandatory Arbitration ClauseMandatory Arbitration Clause

Source: Center for Responsible Lending Source: Center for Responsible Lending http://http://www.responsiblelending.orgwww.responsiblelending.org

Triple Digit Interest RatesTriple Digit Interest Rates

Payday Loans = 380 to 790% APRPayday Loans = 380 to 790% APR

Car Title Loans = 360% APRCar Title Loans = 360% APR

Loansharking = 150 to 250% APRLoansharking = 150 to 250% APR

Pawnshops = 18 to 300% APRPawnshops = 18 to 300% APR

Payday Loan ContractPayday Loan Contract

Usury laws have existed for hundreds of years Usury laws have existed for hundreds of years ““Protect the Needy from the Greedy”Protect the Needy from the Greedy”

Bans the charge of interest to the poor.Bans the charge of interest to the poor.

Exodus 22:25Exodus 22:25

"He who increases his wealth by excessive interest "He who increases his wealth by excessive interest gathers it for one who has pity on the poor." gathers it for one who has pity on the poor."

Proverbs 28:8Proverbs 28:8

Single Balloon PaymentSingle Balloon Payment

Full amount DUE at end of loan termFull amount DUE at end of loan term

Installment or partial payments are prohibited Installment or partial payments are prohibited

Have you ever taken out a loan that you had to Have you ever taken out a loan that you had to pay back in one fell swoop?pay back in one fell swoop?

What is the likelihood that a traditional fringe What is the likelihood that a traditional fringe borrower can repay all at once?borrower can repay all at once?

DEBT TRAPDEBT TRAP

““[Predatory loans] are set up so [Predatory loans] are set up so you have to pay the whole thing off you have to pay the whole thing off in two weeks, and they know you in two weeks, and they know you can’t. can’t. It’s bad enough that the interest It’s bad enough that the interest rates are 380 percent, the worst rates are 380 percent, the worst part is that they trap you”.part is that they trap you”.

Jay Speer, Executive Director – Virginia Poverty Jay Speer, Executive Director – Virginia Poverty Law CenterLaw Center

Loans are Flipped, Rolled or Loans are Flipped, Rolled or RefinancedRefinanced

Typical borrower lives from payday to Typical borrower lives from payday to payday and come up short when loan is payday and come up short when loan is duedueTo avoid default (and have their check To avoid default (and have their check presented for payment) the borrower…presented for payment) the borrower…Flips, rolls or refinances the loan by Flips, rolls or refinances the loan by paying interest again, and again, and paying interest again, and again, and again, and again…again, and again…

DEBT TRAPDEBT TRAP

““That’s the Dirty Little Secret”That’s the Dirty Little Secret”

Payday lending is structured so Payday lending is structured so you just pay the interest every two you just pay the interest every two weeks. They never want you to weeks. They never want you to pay back the principalpay back the principal..

John Oxendine, Georgia Insurance CommissionerJohn Oxendine, Georgia Insurance Commissioner

Simultaneous Borrowing from Simultaneous Borrowing from Multiple LendersMultiple Lenders

““Borrowing from Peter to pay Paul!”Borrowing from Peter to pay Paul!”Exorbitant interest payments eats into Exorbitant interest payments eats into borrower’s paycheckborrower’s paycheck

After a couple of touch ‘n go’s, borrower needs After a couple of touch ‘n go’s, borrower needs another loan to fill hole caused by first loans’ another loan to fill hole caused by first loans’ interest paymentsinterest payments

Can continue for months or yearsCan continue for months or years

Some borrowers have upwards of 13 Some borrowers have upwards of 13 outstanding loansoutstanding loans

Forms of Predatory LendingForms of Predatory Lending

Payday Loans Payday Loans

Car title loansCar title loansPredatory mortgage lendingPredatory mortgage lending

Rent-to-own storesRent-to-own stores

Refund anticipation loansRefund anticipation loans

Buy here, pay here auto dealersBuy here, pay here auto dealers

Pawn shopsPawn shops

Payday Lending – The ProblemPayday Lending – The Problem

Bad check as collateral for up to $500Bad check as collateral for up to $500$15 fee for every $100 loaned$15 fee for every $100 loanedAverage loan is $300 Average loan is $300 Average term is 2 weeksAverage term is 2 weeks

= $45 every 2 weeks in INTEREST= $45 every 2 weeks in INTERESTin 3 months (6 pay periods), already paid back in 3 months (6 pay periods), already paid back

amount over the original loanamount over the original loan!!BUT NO PRINCIPALBUT NO PRINCIPAL

DEBT TRAPDEBT TRAP

Payday Loan TrackerPayday Loan TrackerDate Interest Paid

Oct 1 $45

Oct 15 $90

Nov 1 $135

Nov 15 $180

Dec 1 $225

Dec 15 $270

Jan 1 $315

Original Loan

= $300

Remaining Principal

= $300

Payday Lending – Other ProblemsPayday Lending – Other Problems

Hold checking account hostageHold checking account hostage

Collection practicesCollection practices

Threat of lawsuitThreat of lawsuit

ShameShame

How Did This Happen?How Did This Happen?

Payday Loan Act of 2002Payday Loan Act of 2002 Loophole / exception / special exemptionLoophole / exception / special exemption Can accept “bad” checkCan accept “bad” check Can charge exorbitant interestCan charge exorbitant interest

LEGITIMIZED AND LEGALIZED LEGITIMIZED AND LEGALIZED INDUSTRYINDUSTRY

Payday StatisticsPayday Statistics12/31/2002 12/31/2003 12/31/2004 12/31/05 6/6/2006

Total number of locations 377 596 696 756 776

% Increase from previous year

58 17 9 3

Total dollar amount of payday loans made $165,659,916 $655,645,430 $988,135,464 $1,197,105,829

% Increase from previous year

296 51 21

Total number of individuals to whom payday loans were

made

124,362 285,798 387,696 445,891

% Increase from previous year

130 36 15

Number of individuals who received 13 loans

or more50,928 76,068 90,859

% Increase from previous year

49 19

Payday Lenders in TidewaterPayday Lenders in TidewaterLocalityLocality Payday Lending Payday Lending

StorefrontsStorefronts

Virginia BeachVirginia Beach 6969

NorfolkNorfolk 4545

Newport NewsNewport News 4040

ChesapeakeChesapeake 3030

PortsmouthPortsmouth 2828

HamptonHampton 2727

Source: Bureau of Financial Institutions – licensed payday lenders as of 8/06.

Other lenders get word of lenient restrictions Other lenders get word of lenient restrictions for payday loans in Virginia (industry for payday loans in Virginia (industry friendly state)…friendly state)…

Realize they could make a buck, too!Realize they could make a buck, too!

Car Title Lending – The ProblemCar Title Lending – The Problem

Payday lending’s little brotherPayday lending’s little brother

25% “fee” up front; tacked onto principal25% “fee” up front; tacked onto principal

25% fee per month = 360% APR25% fee per month = 360% APRON A ON A SECUREDSECURED LOAN LOAN

(they have title and extra set of keys)(they have title and extra set of keys)

Repossession = loss of vital assetRepossession = loss of vital asset

How Did This HappenHow Did This Happen

Loophole = “motor vehicle equity line of Loophole = “motor vehicle equity line of credit”credit”

No caps on open-ended loans (meant for No caps on open-ended loans (meant for credit cards)credit cards)

All other small loans capped at 36% APR All other small loans capped at 36% APR via the Consumer Finance Actvia the Consumer Finance Act

Industry hoping to be regulated = Industry hoping to be regulated = NEXT NEXT PAYDAY LENDING CRISISPAYDAY LENDING CRISIS

Car Title StatisticsCar Title Statistics

Currently unregulatedCurrently unregulated

Estimated 150 locationsEstimated 150 locations

Could be us: Tennessee passed car title Could be us: Tennessee passed car title authorizing legislation and there are now authorizing legislation and there are now over 900 car title lenders in Tennessee. In over 900 car title lenders in Tennessee. In 2004, Tennessee car title lenders 2004, Tennessee car title lenders repossessed 17,313 cars. repossessed 17,313 cars.

Three lawsuits settled secretlyThree lawsuits settled secretly

StoriesStories

Ms. C is 58, Ms. C is 58, disableddisabled, lives on a meager $1019 , lives on a meager $1019 per month in per month in Social SecuritySocial Security. She now has . She now has outstanding payday loans with 5 companies and outstanding payday loans with 5 companies and pays $400 a month just to keep them afloatpays $400 a month just to keep them afloat. . Every two weeks, she Every two weeks, she renews one to pay renews one to pay anotheranother. Ms. C finds it takes almost an entire . Ms. C finds it takes almost an entire day to visit each lender with a modest payment. day to visit each lender with a modest payment. A payday collector yesterday told her on the A payday collector yesterday told her on the phone that someone who didn't pay ended up phone that someone who didn't pay ended up downtown in jail. Ms. C is downtown in jail. Ms. C is terrifiedterrified that she will that she will spend the last years of her life behind bars. spend the last years of her life behind bars.

StoriesStories

A recent client (VPLC) was discovered to A recent client (VPLC) was discovered to have have 5 outstanding loans5 outstanding loans: o: one for $500, ne for $500, another for $345, another for $230 and 2 another for $345, another for $230 and 2 for $115 each. She gets a monthly social for $115 each. She gets a monthly social security check of $626. She borrowed security check of $626. She borrowed money because she was temporarily money because she was temporarily taking care of her granddaughter and taking care of her granddaughter and needed money for the related expenses. needed money for the related expenses.

StoriesStories

Janet Ruiz borrowed $2,950 in February, Janet Ruiz borrowed $2,950 in February, 2005 and was charged a 2005 and was charged a cash advance cash advance fee of $737.50fee of $737.50. Her monthly payments . Her monthly payments (interest only) were $1,106.25. By the end (interest only) were $1,106.25. By the end of the year, she owed more than $12,500. of the year, she owed more than $12,500. By April, 2006, By April, 2006, her debt hit $16,000her debt hit $16,000. .

Stories - StressStories - Stress

““I have been a nervous wreck for 2 days and I have been a nervous wreck for 2 days and have cried my eyes out.  The thoughts of going have cried my eyes out.  The thoughts of going to jail--almost made me suicidal thinking if I was to jail--almost made me suicidal thinking if I was dead  my daughter could draw my social dead  my daughter could draw my social security.  This threat was a real threat to my security.  This threat was a real threat to my entire life you see. Please don't think I am entire life you see. Please don't think I am suicidal--but it made me think what if someone suicidal--but it made me think what if someone that was not stable was in this situation thinking that was not stable was in this situation thinking they would go to jail?  Somebody else might go they would go to jail?  Somebody else might go through with it.” through with it.”

VaPERLVaPERL

Virginia Partnership to Encourage Responsible LendingVirginia Partnership to Encourage Responsible Lending member organizations include:member organizations include:

AARP, AARP, Virginia Poverty Law CenterVirginia Poverty Law Center, Virginia Interfaith Center for , Virginia Interfaith Center for Public Policy, Public Policy, Housing Opportunities Made EqualHousing Opportunities Made Equal, Richmond , Richmond Better Business Bureau, Better Business Bureau, CHIP of VirginiaCHIP of Virginia, Legal Aid Justice , Legal Aid Justice

Center, Center, Virginia Organizing ProjectVirginia Organizing Project, Virginia Citizens Consumer , Virginia Citizens Consumer Council, Council, NAACP Virginia State ConferenceNAACP Virginia State Conference, Piedmont Housing , Piedmont Housing Alliance, Alliance, Virginia Muslim Coalition for Public AffairsVirginia Muslim Coalition for Public Affairs, Peninsula , Peninsula Community Development Corporation, Community Development Corporation, New River Community New River Community

ActionAction, Greene County Alliance of Church and Community , Greene County Alliance of Church and Community Efforts (GRACE), Efforts (GRACE), Virginia Area Agencies on Aging (V4A)Virginia Area Agencies on Aging (V4A), ,

Voices for Virginia’s Children, Voices for Virginia’s Children, Tidewater Sowers of JusticeTidewater Sowers of Justice, and , and others. others.

VaPERL at the GA – The PleaVaPERL at the GA – The Plea

Repeal the Payday Loan Act of 2002Repeal the Payday Loan Act of 2002

Delegate O’Bannon’s HB 619Delegate O’Bannon’s HB 619 Undo special exception for industryUndo special exception for industry Avoid passing loose reforms (HB 1621)Avoid passing loose reforms (HB 1621)

Cap car title loan APRs at 36%Cap car title loan APRs at 36%

Delegate Morgan’s HB 325Delegate Morgan’s HB 325 Close loophole to open-ended creditClose loophole to open-ended credit Avoid codifying current practice (HB 1514)Avoid codifying current practice (HB 1514)

ChallengesChallenges

They say…They say…Legitimate need fulfilledLegitimate need fulfilledNo alternativesNo alternativesPersonal responsibilityPersonal responsibilityLost revenueLost revenueFree marketFree marketCompromiseCompromiseReforms not repealReforms not repeal

Countdown to Dec 5Countdown to Dec 5thth

House Commerce & Labor Committee will House Commerce & Labor Committee will vote on HB 619 & HB 325 vote on HB 619 & HB 325

Call, write, and emailCall, write, and email your legislators and your legislators and members of the C&L Committee NOW!members of the C&L Committee NOW! Delegates in your area: Alexander, Purkey, Delegates in your area: Alexander, Purkey,

Suit, Joannou, Melvin, Morgan, TataSuit, Joannou, Melvin, Morgan, Tata

Join VaPERL listserv for more information: Join VaPERL listserv for more information: www.VirginiaFairLoans.orgwww.VirginiaFairLoans.org

““Payday lending is like any other vice – Payday lending is like any other vice – it’s instant gratification, but it’s a bad it’s instant gratification, but it’s a bad deal over the long term. There are not deal over the long term. There are not adequate limitations to protect against adequate limitations to protect against gross abuse. People in financial crisis gross abuse. People in financial crisis need financial counseling, not a quick need financial counseling, not a quick fix. Not a loan that is financial fix. Not a loan that is financial cocaine.”cocaine.”

Bill Whalen, Senior Staff Attorney, Pisgah Legal Bill Whalen, Senior Staff Attorney, Pisgah Legal Services, Ashville, N.C.Services, Ashville, N.C.

THANK YOU FOR YOUR THANK YOU FOR YOUR ATTENTION AND INTEREST ATTENTION AND INTEREST

(the good kind)!(the good kind)!

ANY QUESTIONS?ANY QUESTIONS?