Tens of thousands of homeowners have suffered from predatory lending practices in the recent housing market collapse and the subsequent financial crisis. Yet, predators are not unique to the mortgage industry; they lurk in many corners of the ill-regulated nonbank financial service sector.
Rent-to-own financing has boomed into a multi-billion dollar industry by charging consumers high interest rates for installment payment plans. A $2,000 computer can cost $3,600 at a nearly 71 percent annual interest rate.
Close to 10 million households pay $1.5 billion for cashing their checks in nonbank outlets.
Recipients of Earned Income Tax Credit typically pay 7.8 percent of their federal refund for so-called “refund anticipation loans,” wasting up to $800 million each year.
Borrowers in need of a small, short-term loan often pay a 15 percent up-front fee for a “payday loan” and have only two to four weeks to repay the whole amount. Otherwise, they have to take out a new loan to pay off the old.
Similar to payday loans, “car title loans” offer small “emergency” loans which easily roll into new loans when borrowers cannot repay. With a triple-digit annual interest rate, they trap borrowers into a vicious debt cycle.
Used car dealers are known to lure low-income consumers into expensive loans. Some 4.5 million lower-income consumers pay, on average, 2 percentage points more in interest than higher-income consumers.
Rather than helping our vulnerable citizens, these lending practices take advantage of lower-income people and exacerbate their financial difficulties. They not only prey on working families struggling to survive, they have also affected, most unfortunately, the men and women of our Armed Forces who protect our security and prosperity.
In a letter to the U.S. Department of the Treasury earlier this year, Clifford Stanley, undersecretary of defense for personnel and readiness, stated that the Department of Defense would welcome and encourage the Consumer Financial Protection Agency to protect service members and their families against unscrupulous automobile sales and financing practices. Based on the Defense Department’s own informal survey, among the 659 financial counselors and lawyers who counsel service members and responded to the survey, 72 percent reported that their clients have raised complaints in the last six months about auto financing practices, such as “bait and switch” financing, loan document falsification, “packing” loans with items of dubious value and inflated price tags, and discriminatory lending.
In addition, service members have listed “finances” as a major source of their increasing stress, trailing only work and career concerns while surpassing deployments and even war/hostilities.
“Since auto financing represents the most significant financial obligation for the majority of service members, particularly in the junior enlisted grades,” wrote Stanley, “we believe the intervention of the CFPA in overseeing auto financing and sales for service members will help protect them and will assist us in reducing the concerns they have over their financial well-being.”
The CFPA, as proposed in Sen. Chris Dodd’s financial reform bill, could write rules for nonbank financial companies but could only enforce these rules on nonbank mortgage companies. It would have to petition designated regulators for authority over all the other nonbank financial entities, such as check-cashers and auto loan lenders.
In Maine, we have a history of protecting our consumers against abusive business practices. In 2005, Maine’s Legislature limited the interest rates that payday lenders could charge, making it impossible for them to thrive and grow in Maine. In 2007, the Legislature unanimously passed an anti-predatory lending law that curbed abusive lending practices particularly targeted to nonbank lenders making unaffordable subprime loans. In 2009, the Legislature rejected raising fees for the debt settlement industry and prevented expansion of an industry with questionable benefits for Maine consumers.
To ensure a sound financial environment for all consumers, the U.S. Senate must strengthen its financial reform bill by expanding the CFPA’s authority over nonbank financial sectors. At the same time, we must set federal regulations as the minimum standard and reserve our right to make necessary enhancement s at the state level.
It is time to restore honesty and fairness in business, and it is time to stop all predatory lending practices.
Connie Zhu is a policy analyst with the Maine Center for Economic Policy.