Predatory Lending

Earlier this year, a magnificent joint investigative effort by the New York Times and the American Broadcasting Company’s 20-20 program threw a rare spotlight on the shady practices that predatory lenders use to rip off citizens in low and moderate income and minority neighborhoods.
The series got enough national attention to prompt Congressional Democrats and Republicans into producing piles of news releases lamenting the practices. Nine months later with the news releases long forgotten, Congress is preparing to adjourn without any meaningful action to curb the excesses.

The Federal Reserve conducted limited hearings and the Treasury Department and the Department of Housing and Urban Development issued a joint report on predatory lending. But, new regulations which might actually put teeth in the efforts to curb the ripoffs haven’t appeared. Instead, there has been a lot of talk about collecting data and the “need for more evidence.”

“We should be able to agree that more information is an important prerequisite to sensible policies in this area,” Federal Reserve Governor Edward Gramlich said recently. Translated, the Federal Reserve is letting us know that tough action against the predators is a long way off, if ever.

This “go slow” approach is a far cry from the gung-ho attitude of Federal Reserve Board Chairman Alan Greenspan when he was lobbying for immediate passage of massive deregulation of the financial services industry last year. Then speed was the word of the day, and calls for more information on the impact of deregulation on financial stability and safety or on consumer and taxpayer protections were dismissed.

At the Federal Reserve and in the Congress, it is one thing for the nation’s biggest banks, insurance companies and securities firms to want action on their desires. Quite another when low and moderate income citizens want action to protect against financial predators. Then the important question, as Governor Gramlich tells us, is the collection of more information, not quick remedial action.

While the Federal Reserve’s leisurely collection of data inches forward, citizens continue to be ripped off by predatory lenders employing extortionate interest rates, outlandishly high fees, refinancing and home equity scams, balloon payments and a welter of other deceptive practices. High-priced credit is pushed on unsuspecting borrowers who don’t have the income to meet the mounting payments. At the end of all too many of these cases, are foreclosures, bankruptcy and further deterioration of neighborhoods.

Even without the scourge of this new generation of predatory lenders, the poor face a multitude of barriers when they attempt to obtain credit and other financial services at a fair and reasonable cost.

An estimated 22 million Americans do not have bank accounts. This means that these citizens must turn to check cashing firms, liquor stores, loan sharks and other costly means to carry out their financial transactions.

This has spawned a new rip-off enterprise—pay-day loans. Faced with the need for emergency cash, consumers borrow against their next pay check, at annual percentage rates ranging up to 500 percent or more. Lacking cash, many low income families obtain appliances, television sets and other products from “rent to own” stores where charges usually
amount to the two and three times the value of the item. On a $200 television set, a consumer may pay $500 to $600 over the life of a rent to own contract.

Banks establish few branches in low income neighborhoods. Even more difficult for poor citizens is the fact that banks, for the most part, don’t make small loans, the kind of credit that low-income citizens need to avoid the high priced loans peddled by “pay day” operators and loan sharks. Credit unions, particularly community development credit unions, are an answer, but too little is being done to promote them. This should be a priority for the credit union movement, the next
Administration and the Congress.

For too long, the agendas of the regulatory agencies, the Congress and the Executive Branch have been oriented to the care and feeding of the biggest financial corporations. Washington needs to be shamed into devoting just a fraction of its time, money and muscle to shaping a financial system that serves everyone, including the poor on a fair basis.