By Charlene Crowell
Each year the many forms and products of predatory lending drain at minimum hundreds of billions of dollars from the nation’s economy and communities across the country. Abusive lending imposes high initial costs and ushers in a host of long-term debt for borrowers and communities.
For example, in the subprime mortgage boom, specific abuses added thousands to the price borrowers paid. These abuses also triggered incredible long-term costs. From 2007 to 2012, the housing crisis alone cost the nation $10 trillion and 8.4 million jobs.
New research from the Center for Responsible Lending (CRL) examines how abusive lending has cumulative impacts on consumers, communities and the nation. Released June 16, The State of Lending in America and its Impact on U.S. Households finds that in addition to paying high fees and interest over the long-term, predatory loans and practices force borrowers to forfeit financial opportunities while robbing consumers of economic mobility.
“This report shows how the damage can be compounded, creating a long-term barrier to upward mobility,” wrote Michael Calhoun, CRL president in the report’s foreword. “Responsible lending products can create a critical pathway to economic security, especially for low-and-moderate-income families. ‘Families who lose their home to foreclosure not only forfeit their existing equity, they also lose the opportunity to build savings, since they may be locked out of affordable credit for many years.”
As highlighted in the report, responsible mortgages made during the recent housing crisis to subprime borrowers resulted in an average gain of approximately $20,000 in home equity.
Consumers of color – often Blacks and Latinos – were found to be two to three times more likely to be the target of an abusive lending than White borrowers – whether the product was a subprime mortgage with a pre-payment penalty, a payday loan, an auto loan that had an interest rate marked-up by the dealer or taking on debt for enrollment at a for-profit college.
Additionally, if a borrower has one abusive loan, he or she may be more likely to struggle with other debts. And in some cases, one abusive prompts another as household financial stresses mount.
Among the report’s key findings:
• Fifty-five percent of car-title loan borrowers also have taken out a payday loan;
• One-third of payday loan borrows repaid their loan by overdrawing their checking account and paying an overdraft fee to their bank; and
• One in seven jobseekers with blemished credit has been passed over for employment after a credit check.
“Consumers are not simply mortgage holders, credit card users, or payday loan borrowers – they are likely to participate in more than one market, often at the same time,” said Sarah Wolff, CRL senior researcher and author of the report. For borrowers victimized by predatory practices, the costs are high, compounding and long-lasting. And this is especially troubling when considering that predatory lending disproportionately impacts lower-income families – contributing significantly to the widening of this country’s wealth gap.”
Families devastated by subprime mortgages in the housing crisis are not the only ones affected by predatory lending. Abusive lending tactics, like lenders extending credit without assessing the borrower’s ability to repay, occur on multiple types of loans.
For example, payday loans have interest rates ranging from 391-521 annual percentage rates and are made without assessing ability to repay. In fact, only 25 percent of payday loans are ever retired in a two-week period while 75 percent of payday loan volume results from borrowers re-borrowing every two weeks. Ultimately, half of payday borrowers eventually default and face as a result myriad consequences.
If a bank customer, for example, incurs too many fees for insufficient funds, banks can and often do close these accounts, leaving the former customer to use costly alternative financial services such as check-cashing services, prepaid cards, and more.
In other instances, a payday borrower hoping to finally pay off a payday loan may turn to a car-title loan. By doing so, the payday loan may be finally satisfied; but the high-cost of the car-title loan saddles the borrower with even more debt and puts the borrower at risk of losing his or her personal transportation at a fraction of the value of the vehicle. Even in instances where vehicles are taken by title-loan lenders, the consumer will still owe the balance of the title loan and additional fees related to the repossession. How personal transportation will be managed becomes yet another personal crisis.
In short, every new form of predatory lending leads to greater financial instability, and siphons hard-earned wages from families.
By contrast, responsible lending, says the report, “provides fair, affordable and transparent loans. . . .Just as a hammer can be used to build a house or take it down, lending can help families build wealth or strip it away.”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.firstname.lastname@example.org.