Predatory Lending: Issues Affecting the Elderly

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1 Predatory Lending: Issues Affecting the Elderly Elder Law Conference Friday, August 5, 2011 University of Mississippi School of Law Oxford, Mississippi A M A N D A G L O V E R E V A N S A T T O R N E Y A T L A W M I S S I S S I P P I T A X P A Y E R A S S I S T A N C E P R O J E C T D I R E C T O R 5 C O U N T Y R O A D / P. O. B O X O X F O R D, M I S S I S S I P P I , X 2120

2 Mississippi Taxpayer Assistance Project Represent low income taxpayers before the Internal Revenue Service (IRS) in audits, appeals, collection issues, and federal tax litigation at no cost to the taxpayer Serve the entire state of Mississippi Taxpayer Assistance Hotline:

3 The High Cost of Being Poor Loosely regulated network of lenders (fringe banking) payday lenders title loans rent-to-own stores pawn shops refund anticipation loans subprime home mortgage loans High costs of the poverty industry operate to drain wealth from the working poor Often accompanied by unscrupulous and/or fraudulent lending practices

4 Who are the victims? The Target Market Low to moderate income Individuals of color Elderly Persons in a financial or housing crisis Those who are equity-rich but cash-poor Individuals who lack information to choose the best product Those who do not perceive having financial options Borrowers who are scared of the lending process and do not comparison shop

5 Financial Abuse of the Elderly Persons age 80 and older are abused and neglected at a rate of two to three times higher than their percentage in the general population Female elders are abused at a higher rate than males Half of elders found to be abused or neglected were not physically able to care for themselves Adult children are responsible for almost half of elder abuse and neglect cases Four to five times as many elder abuse incidents occur as are reported National Center on Elder Abuse, The National Elder Abuse Incidence Study (NEAIS), 1998.

6 Evolution of Predatory Lending Consumer Credit Culture Immediacy, Get it now, pay for it later. Increased Home Values Steady increase in equity allowed individuals to borrow against their home (equity loans) Lack of Access to Mainstream Financial Services Overwhelmed Consumers Unscrupulous Lenders and Brokers

7 Prime Lending Review of risk in lending to borrower Lending characteristics analyzed Credit rating Collateral Work record The consumer is buying a loan product The consumer must fit into the lending product box

8 Sub-Prime Lending Often no evaluation of risk No credit check. Only need a pay stub. No review of lending characteristics The consumer is sold a loan Loan is customized to consumer

9 Annual Percentage Rate (APR) Assists consumers in comparing how much it costs to borrow By law APR must be listed on loan documents Always check APR on the loan Compare the APRs of different loans

10 Calculating APR

11 Predatory Lending in the Mortgage Industry

12 Costs of Predatory Lending in the Mortgage Industry It destroys credit and opportunities It causes foreclosures It creates homelessness It robs wealth from families, neighborhoods, and communities It strips families of hopes and replaces dreams with shame and embarrassment

13 Problem Mortgage Lending Practices Offering debt consolidation loans Working closely with home improvement contractors Marketing foreclosure rescue Home equity lines of credit Referrals from mortgage brokers for high fees Loan denial and referral to higher cost lender

14 Borderline Predatory Tactics High interest rates and fees Balloon payments Negative amortization High loan-to-value loans (in excess of home s value) High prepayment penalties

15 Predatory Lending Practices of Subprime Lenders Packing loans with high unnecessary costs o o o o o Padded closing costs Inflated appraisal costs Padded recording fees Broker fees Listing fees as unbundled Flipping with repeated refinancing Forging loan documents Withholding information

16 Mississippi Economic Policy Center, Mississippi Subprime Lending Fact Sheet, 2007.

17 Mississippi Economic Policy Center, Mississippi Subprime Lending Fact Sheet, 2007.

18 Protections from Predatory Mortgages Federal The Truth in Lending Act (TILA) Home Ownership and Equity Protection Act (HOEPA) Real Estate Settlement and Procedures Act (RESPA) State Unfair and Deceptive Acts and Practices Laws (UDAP) No broad prohibition of deceptive acts enforceable by consumers Mississippi is next to the weakest overall consumer remedies Carter, Carolyn L., National Consumer Law Center, Consumer Protection in the States: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes, 2008.

19 Check Cashing and Payday Loans

20 Check Cashing Fees Federal/State Government Checks Greater of 3% or $5.00 Personal Checks Greater of 10% or $5.00 Money Order Greater of 5% or $5.00 Mississippi Code of 1972, , Mississippi Check Cashers Act

21 Check Cashing Pros and Cons Pros Accessible Open 24 hours a day No account needed Cons Cash in hand No establishment of credit No banking history High fees

22 Check Cashing Alternatives Cash check at the payer s bank Direct deposit Open a bank account No fees or fees less than check cashing services Money is safe in an account May be able to earn interest Develop a history with the bank ETA (electronic transfer accounts) for Federal payments

23 What are Payday Loans? So named based on the short-terms of these loans often corresponding to the length of time between paychecks High interest rate Short term loans Backed by borrower s personal check

24 Mississippi Check Cashers Act Mississippi Check Cashers Act o Maximum deferred deposit amount, including interest, and total of checks held is $ o 18% on face value on the check is the maximum rate a check casher can charge o Maximum of 30 days deferred deposit o Current law until December 31, 2011 Mississippi Code of 1972, , Mississippi Check Cashers Act

25 Mississippi Payday Loans Are Extremely Expensive High interest: Average APR of 572% to borrow money for two weeks Average APR charged for a payday loans is 470% Repeat borrowers: 99% of borrowers are repeat borrowers Multiple Loans Yearly: 91% of loans to borrowers who have had five loans per year or more Typical payday loan borrower repays $793 for a $325 loan Concurrent Loans: many borrowers have loans from three to four payday lenders at a time Mississippi Economic Policy Center, Mississippi Payday Lending Fact Sheet, 2007.

26 Booming Payday Lending Industry 2000 to payday lending revenues tripled from $10 billion to $28 billion Mississippians paid an estimated $135 million to payday lenders in 2005 Mississippi has the highest concentration of payday lenders in the nation Mississippi Economic Policy Center, Mississippi Payday Lending Fact Sheet, 2007.

27 One Check Cashier for every 1,014 households

28 Payday Lenders in Mississippi

29 Internet Payday Loans

30 National/Federal Legislative Reforms North Carolina: Outlawed payday lending in 2001 Georgia: Enacted an interest rate cap on small consumer loans of 60% APR per year in 2004 Federal: Law effective in October 2007 limiting APR to 36% for military personnel, and prohibiting that the lender access borrower s bank account or car title as collateral for loan

31 Mississippi Check Cashers Act (House Bill 455) Effective January 1, 2012 Maximum total of checks held is $500.00, including fees 30 day maximum deferral $200 or less Deposit delayed up to 21 days Fee not more than $20 per $100 advance $ $ Deposit delayed days Fee not more than $21.95 per $100 advance No rollover or flipping loan repayment plan permitted

32 Title Cash Loans

33 Car Title Loans Marketed as small emergency loans Short term loan secured by the borrower s vehicle Car can be repossessed for non-payment of loan Small Loan/Over-secured Loan made without credit checks or tests for ability to pay Interest ranging from 1% daily interest to 360% APR

34 Mississippi Title Pledge Act Maximum Loan $2,500 25% finance charge per month = 300% APR 30 day loan that can be renewed Reduction of principle amount being reduced by 10% in service charge calculation 30 days to cure default Repossession of vehicle if no cure Redeem by paying unpaid balance and repossession costs within three (3) days If vehicle sold, the borrower receives 85% of sale above unpaid balance, repossession fees, auction fees, and $100 sellers fee, no deficiency Mississippi Code of 1972, , Mississippi Title Pledge Act.

35 Rent-to-Own

36 Rent-to-Own The predatory rent-to-own industry promises consumers the American dream of ownership Marketed as a risk-free way to acquire furniture and appliances "For only 78 weekly payments of $10, you, too, can own this television." Rent-to-own stores charge an average effective annual percentage rate (APR) of 100 percent

37 Common Rent-to-Own Fees Besides the normal weekly or monthly payments, other fees may be charged on rent-to-own agreements: processing fees delivery fee setup/installation fees in-home collection fee sales tax home pick-up fees damage waiver fees reinstatement fees

38 Cash Price of Rent to Own Sales price of the item is 2-5 times that of a regular retail store Many items not clearly marked new or used RTO Store Retail Store Difference 19 Color TV 14 cf Refrigerator $ $ x higher $ $ x higher

39 Rent to Own Alternatives Plan ahead and save for large purchases Use store layaway plans at reputable stores Shop at thrift or consignments stores for lower cost items

40 Pawn Shops

41 Pawn Shops Pawnbroker takes an item they believe they can resell for an amount while loaning the borrower less than the fair market value of the item The item is maintained by the pawn shop as collateral The pawn shop charges interest per month on the loan If the money is not repaid within a certain time period the item will be forfeited and sold by the pawn shop Item can be redeemed within 30 days of fixed maturity date of the loan Mississippi Code of 1972, , Mississippi Pawnshop Act.

42 Refund Anticipation Loans (RALs)

43 RALs Similar to payday loan income tax refund pays balance of loan Marketed as Quick Cash or Rapid Refunds In 2009, 7.2 million Americans obtained RALs at a cost of $600 million in fees Paid by the poorest Americans 87% of borrowers in poverty In 2011, the price for a typical RAL (Republic Bank and Trust) for a loan of $1,500 is $61.22 in fees and $29.95 for the check National Consumer Law Center and the Consumer Federation of America, 2011 Refund Anticipation Loan Report, End of the Rapid Rip-off: An Epilogue for Quickie Tax Loans, 2011.

44 RALs Are Risky RAL must be repaid even if IRS denies or delays tax refund RAL is a loan and treated as a loan by the lender Lender may seize future year tax refunds for payment of past loans

45 RAL Alternatives Just wait! E-file with direct deposit 7 10 days for direct deposit Open a bank account Tax preparation by VITA or TCE sites TAX-1040

46 Beyond Tax Preparation Offices Refund Down-Payment Offers Car dealerships Furniture outlets Jewelry stores The dealer/store offers to prepare the tax return and use the anticipated refund as a down-payment on the purchase. Excess Costs High preparation fees High loan fees Other fees associated with the purchase

47 Questions???

48 Predatory Lending: Issues Affecting the Elderly Elder Law Conference Friday, August 5, 2011 University of Mississippi School of Law Oxford, Mississippi A M A N D A G L O V E R E V A N S A T T O R N E Y A T L A W M I S S I S S I P P I T A X P A Y E R A S S I S T A N C E P R O J E C T D I R E C T O R 5 C O U N T Y R O A D / P. O. B O X O X F O R D, M I S S I S S I P P I , X 2120

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