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Predatory Lenders: The Truth Examines Despicable Lending
Practices – Part 1
By Fletcher Word
Sojourner’s Truth Editor
“It was a nightmare,”
recalls Deborah (not her real name) of her recent years in
debt – crushing, mind-numbing debt. A young single woman in
Toledo with a reasonably well-paying job, Deborah admits she
wanted too much too fast and started her slide into debt by
running up purchases on the credit cards that college
students have such easy access to.
That debt damaged her
credit score so badly that in order to purchase a car to
replace her battered heap, she had to go to a “buy here, pay
here” auto lot. In order to purchase the appliances she
wanted, she had to go to a one of the rent-to-own
establishments that charged her twice what a department
store would have.
The exorbitant interest on
the auto loan and the furniture were more than Deborah’s
salary could bear so she sought out a pay day lender to ease
her financial burdens. The small loan she obtained was not
enough to provide relief, especially since the interest on
it was 10 percent – for 30 days. It was inevitable that she
would obtain a larger loan at another pay day lender to pay
off the first pay day lender and the rent-to-own furniture
store and the auto loan.
Every other Friday,
Deborah would go to her bank and cash her pay check. Then
she would make her rounds – to the “buy here, pay here” auto
lot, then to the furniture rental store, then to the first
pay day lender and onto the second lender.
Self-discipline finally
kicked in and Deborah set out to reverse her fortunes. She
cut up the credit cards and forced herself to undergo a year
of frugality. She wasted not a penny – no restaurants, no
bars, no concerts, no new clothes. She gave up her
unnecessary appliances and even changed her diet. Ramen
noodles, it seems, became a staple in most nightly menus.
It was a long year, but it
worked for Deborah. Unfortunately, Deborah’s method is not
the everyday prescription for success. Most folks lack
Deborah’s discipline. It is people’s lack of discipline that
enables predatory lenders thrive in today’s economy. Here in
Ohio, which has the highest payday loan prices in the
nation, according to the Pew Charitable Trusts report of
December 2016 with a typical annual percentage rate (APR) of
591 percent, they thrive particularly well.
Predatory lending, by definition, benefits the lender and
ignores or impedes the borrower’s ability to repay the debt.
Such lenders often try to take advantage of a borrower’s
lack of understanding about loans, terms or finances.
For some people,
particularly those of low to moderate incomes (LMI), the
daily struggle of dealing with a limited or fixed income
sometimes necessitates reaching out for help. More often
than not, the help they reach for comes from entities whose
only reason for existence is profit not assistance.
A local man named George
(not his real name) discovered, much to his chagrin, that
such lenders were more interested in making a profit than in
helping clients. Recently, George found himself in need of
instant financial assistance. Fortunately, or unfortunately
as it happened, he owned the title to his vehicle. He needed
$2,000 so he went to a company called Title Max, which
specializes in loans for car owners.
Title Max has about 1,200
locations in 18 states and over the years has taken a
beating from the federal government because of the company’s
lending practices. The company has been fined millions of
dollars for such practices but not enough to force it out of
business.
George took his truck
title into a Title Max location, met with some really nice
people, walked out with the $2,000 he needed.
The bad news? Title Max
charged George 201.75 percent interest annually or $331.55
per month. The really bad news? George had to pay off the
entire principal with the accumulated interest before the
debt could be discharged. The loan contract that George
signed ensured that Title Max keep collecting that $331.55
per month, every month, even if George could pay any portion
of the original $2,000 borrowed.
George, of course, had
anticipated being able to pay back $2,331.55 after the first
month. He soon found that his goal of paying back the loan
immediately were unrealistic. After only two months, he’s
paid $662.10 in interest and sees no way in which he can get
out from under without seeking additional financial help.
Then there is Ralph, who is still living his financial
nightmare … with a mortgage company. Or a number of
mortgage companies as it turns out. Ralph and his wife
purchased a home in 1987 for $15,000. The mortgage
company that originally financed the house failed and
his mortgage was picked up by another company, then
another. Three decades later, Ralph has paid over
$50,000 to a variety of mortgage companies and still
owes $19,000 on the house he bought for $15,000.
The Truth’s Series on Predatory Lending
Over the course of the
next two months, The Sojourner’s Truth will be presenting a
multi-part series on predatory lenders and the impact such
predators have on the community especially on those of low
to moderate income.
This series will consist
of a look at five categories of businesses that prey on the
community: pay day lenders; housing lenders; auto title and
dealers; rent to own furniture and appliance shops and the “fixits.”
The “fixits” are those who present themselves as credit
repairers for a sum of money who then leave their clients
worse off than before.
We have interviewed – and
will continue to do so – those who have been victimized by
such predators, those who have done the preying, attorneys
to understand the legal ramifications and those mainstream
lenders who have explained alternatives to the predators.
Our series on these predatory practices will start with
our look at pay day lenders on March 1 and will follow
on every other week thereafter.
The irony of the way that
predatory lenders operate is that they often do business
with, and therefore take advantage of, people who can least
afford the services they offer. A federally insured and
regulated bank or credit union will offer qualified
borrowers – those with good credit histories – loans with
low interest rates because there is very little risk
attached.
The better the borrower’s
credit score, the lower the interest. That means low
interest rates for loans to finance the purchase of a home,
an auto, a boat, a remodeling project, a college education.
Higher interest rates are typically imposed on qualified
borrowers with lower credit scores. The same
federally-insured financial institutions will turn away
unqualified would-be borrowers in to limit their risk. Such
borrowers might have been able to afford a loan with a low
interest rate, but there is risk, because of past
performance, for the lender.
Now come the operators who
are prepared to deal with high risks – the pay day lenders,
the predatory mortgage lenders, the “buy here, pay here”
auto dealers, the rent-to-own furniture stores. Interest
rates of these lenders can be three to four times those of a
federally-insured financial institution, or of a mainstream
retailer, in a best case scenario. In a worst case scenario,
and the state of Ohio is the worst case in the nation as far
as pay day lenders is concerned, the interest rate may be in
excess of a hundred times that of a regulated financial
institution.
Yes, that’s 100 times and
Ohio is the worst. Its typical annual percentage rate is 591
percent for payday lenders.
“I found myself in a place
where I wasn’t making the money I had been making,” says
David (not his real name).
David, 65 years old, lived
with his mother until her death about six years ago. Her
Social Security income along with his wages kept the two
afloat. David has been employed for years in a job that pays
him above minimum wage level but below living wage level.
Upon his mother’s death, the Social Security income stopped
, shortly after that, his earnings at work decreased due to
a lack of work.
For David, assuming that
banks and credit unions would be unresponsive to his needs,
the logical choice was to seek help with a pay day lender.
He went to one such lender
to obtain a small amount of funds - $200 which needed to be
repaid in the amount of $220 after 30 days – and then to
another to fill the gap left between what he originally
needed and what the first lender had given. He received $500
from a second lender and $640 from a third lender. From one
lender to the next David went, covering the payment of one
loan by taking out another. In a very short while it became
“overwhelming.”
David also needed to buy a
car, at about this same time. He needed to take out an auto
loan to do so. He was only able to obtain financing at a lot
that charged him 10.85 percent interest in a used vehicle.
His weekly payments were $90. “They charged too much to
start with,” says David.
While the car lot was not
one that did its own extravagant financing, it had limited
his options by steering him to the bank of its choice rather
than to one which might have offered more favorable terms.
Soon, as luck would have
it, David found himself in need of a washer/dryer He
obtained one at a Rent-A-Center at a rate of $42 every two
weeks which in the end would cost him twice as much had he
been able to pay cash at a mainstream department store.
David spent several years
dodging bullets and dealing with the stress. “They literally
tore me up,” he recalls.
David’s employer finally
questioned him about his obvious discomfort. After hearing
of the state of his employee’s financial situation, the
employer, who also happens to be a lawyer, took control of
David’s finances. He lent him money, sent letters to
creditors, re-negotiated contracts, moved the auto loan to
Toledo Urban Federal Credit union for about half the
original interest rate, paid off the Rent-A-Center and
eventually pulled David back from the brink of disaster.
The pay day lenders, the
predatory mortgage companies, the auto dealers or title
lenders and the rent-to-own companies give only minimal
lip-service to being in business to help their clients. Very
little pretense with such companies.
On the other hand, of
course, there are those companies who do pretend to be in
the service of others and will therefore vow to those in
need of credit repair that they can fix what’s wrong and in
short order, too. So, toss some money at them and trust that
they will do as promised.
The problem with virtually
all of these companies is that they want to increase a
person’s debt before they will lessen, or pretend to lessen,
that debt.
Title IV of
the Consumer Credit Protection Act, prohibits untrue or
misleading representations and requires certain affirmative
disclosures in the offering or sale of "credit repair"
services. The Act bars companies offering credit repair
services from demanding advance payment, requires that
credit repair contracts be in writing, and gives consumers
certain contract cancellation rights.
So we made a
preliminary inquiry of a company called Credit Repair USA.
They have signs strewn about the area on street corners
offering credit repair services for $269. When we inquired,
we were told that the fees were not for “actual credit
repair.” The upfront cost would be for processing charges
and personnel fees.
For too
many, especially those of low to moderate income, especially
those in minority communities, especially those who are not
knowledgeable about how to manage their finances or how to
find honest brokers to assist them in times of need, their
communities are awash with predators who are all too willing
to loot and plunder and invest their ill-gotten profits in
areas far from those communities that produced them.
In the words
of Toledo City Councilwoman Cecelia Adams, PhD, whose office
will be soon introducing legislation designed to rein in pay
day lenders, such operators are “a carbuncle on the behind
of our community.”
More on pay
day lenders in our March 1 issue – two weeks hence.
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