Consumer Law & Policy Blog

Martin & Longa Study of Whether Payday and Title Loans Serve the Middle Class

Nathalie Martin and Ernesto A. Longa, both of New Mexico have written High-Interest Loans and Class: Do Payday and Title Loans Really Serve the Middle Class?, 24 Loyola Consumer Law Reporter 524 (2012). Here's the abstract:

This symposium article addresses the question of whether payday and title lenders serve primarily the working poor, as some critics claim, or the middle class, as the payday and title loan industries claim.

This article starts by discussing how and why lenders claim to serve the middle class. It then describes how scholars define the middle class and the typical indicia of middle class America. The paper then summarizes the demographic data gathered to date on payday and title loan customers, focusing on income and home ownership rates, and concluding that these data refute the middle class myth. The article also briefly discusses how geographic studies bear on the questions of class and payday and title loans. Next, this article describes the methodology and results of our own study of payday demographics, which analyzes data from the Bankruptcy Court for the District of New Mexico from 2007-2011. This article ends with the results of this modest study, which conclude that bankruptcy debtors who list payday loans are far less likely to own their own homes and overall, have lower incomes than bankruptcy debtors who do not list payday loans. It also concludes that the bankruptcy debtors in the sample who also own homes did not turn to payday loans in higher numbers after the 2008 crisis.

Kathleen Engel Revisits Suits by Cities Against Financial Firms

 

Kathleen C. Engel

 of Suffolk has written The State of Play in City Claims against Financial Firms.  Here's the abstract:  

In 2006, before the subprime mortgage crisis and the collapse of the financial markets, I wrote an article, “Do Cities Have Standing? Redressing the Externalities of Predatory Lending.” In the article, I addressed the possibility that cities had standing to recover for the damage that predatory lenders were inflicting on their communities. At the time, exploitative lenders were putting unsophisticated borrowers in loans they could not afford, and many of those borrowers have since lost or will lose their homes.

Municipalities were in impossible positions. They were powerless to prevent abusive lending. Only states and federal legislatures and regulators had the authority to restrict unfair loan products; yet the cities bore the burden of unaffordable loans in the form of abandoned property, displaced families, increased demands for police and fire protection, and declining tax revenues.

Six years later, we now know more about the role of lenders in exploiting borrowers. We also know more about the impact that irrational and unfair lending has had on communities. And, most importantly for this essay, several cities have brought lawsuits that test some of the theories I put forth in my original article.

Jon Entin and Shadya Yazback wrote an article in response to “Do Cities Have Standing,” in which they echoed my analysis of city standing as parens patriae and as claimants for injuries to their proprietary interests. They also explored the potential for claims under the Fair Housing Act and discussed the role that preemption has played in limiting cities’ ability to directly regulate lenders. This essay is a follow-up to both my article and the Entin and Yazback piece.

DOJ Reaches Historic Lending Discrimination Settlement With Wells Fargo for $175 Million

Wells Fargo Bank, the largest mortgage lender in the country, has agreed to pay more than $175 million in a landmark settlement with the Justice Deparment over allegations of racial discrimination against African-American and Hispanic borrowers. Wells is paying $7.5 million to the City of Baltimore to settle its separate fair-lending suit against the lender.

This is the second-highest fair lending settlement in history. According to the DOJ's press release, the settlement "provides $125 million in compensation for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin," as well as "$50 million in direct down payment assistance to borrowers in communities" (including Baltimore) with large numbers of discrimination victims. The settlement also includes a review process with additional compensation for retail borrowers who were placed into subprime loans where similarly situated white borrowers received prime loans. The Los Angeles Times has an article on the settlement here, the DOJ press release is here, and the consent decree is here. 

Times Article on Whether the OCC Will Change

by Jeff Sovern

The Office of the Comptroller of the Currency has long been the poster-child for an agency captured by the entities it regulates--in this case, national banks.  Thus, when states enacted anti-predatory lending statutes, the OCC declared them pre-empted as to national banks. Similarly, the OCC went to court against New York to protect national banks from state enforcement of fair lending laws.  But now the OCC has a new leader. Will things be different?  The Times has a report here. An excerpt:

Previously, O.C.C. regulators have emphasized that they want our banking system to be “safe and sound.” To that, Mr. Curry has added the word “fair.” A banking system needs to serve people and businesses, so that we don’t simply have, as he says, “a safe and sound national bank system just for sake of the system itself.”

“I’m committed to improving the agency’s reputation,” Mr. Curry told me.

The question is whether the host will reject the transplant.

Washington Post Reports on Wells Fargo Subprime Loan Officer in Baltimore Predatory Lending Case

Back in 2008, we reported on the suit that the City of Baltimore had filed against Wells Fargo alleging that the bank had targeted African-American neighborhoods in Baltimore for deceptive, predatory, and otherwise unfair mortgage practices. Several amended complaints later, the suit is still intact, and Judge Motz's latest opinion denying Wells Fargo's motion to dismiss is here. Discovery is going on now and, meanwhile, the Washington Post has just published an article profiling one of Baltimore's star witnesses, Wells Fargo's former top subprime loan officer, who described in a declaration how the bank drove home owners with good enough credit to qualify for prime loans to subprime loans because they were more profitable for the bank.

Jeff Gelles Column: How Arbitration Clauses Enable Businesses to Thumb Their Noses at Consumer Protections

Here.  A very interesting illustration. 

Bloomberg Report on Force-Placed Insurance Pushing Homeowners Into Foreclosure

Bloomberg editorializes against force-placed insurance in the mortgage market. An excerpt:

[S]ome lenders haven’t merely been unhelpful; their actions have pushed some borrowers over the foreclosure cliff. Lenders have been imposing exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. The policies, standard homeowner’s insurance or extra coverage for wind damage, say, for Florida residents, typically cost five to 10 times what owners were previously paying, tipping many into foreclosure.

***

It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low- income consumers. An investigation by Benjamin Lawsky, who heads New York State’s Department of Financial Services, has found nearly 15 percent of the premiums flow back to the banks.

It doesn’t end there. Lenders often get an additional cut of the profits by reinsuring the force-placed policy through the bank’s insurance subsidiary. That puts the lender in the conflicted position of requiring insurance to protect its collateral but with a financial incentive to never pay out a claim.

Both New York and California regulators have found the loss ratio on these policies -- the percentage of premiums paid on claims -- to be significantly lower than what insurers told the state they expected to pay out, suggesting that premiums are too high.

WaPo Article on Payday Loan: $450 cost for $1,500 loan, or 651% APR

Here. An excerpt:

[W]henever Newman [the borrower] tried to pay more than the monthly rate, the lenders encouraged him to keep his money.

“They were trying to keep that money going, to hold on to me and keep pumping cash out of me,” Newman said.

* * *

“I’ve gotta tell people to stop. ‘Think. Slow down. Sit back. Don’t do it,’ ” Newman told me. “Those loans are addicting. I always wonder, ‘Who’s gonna give me a loan?’ and all of a sudden — Bam! — here’s someone who will.”

New Foreclosures Report from NCLC

A new report from the National Consumer Law Center, documents, for the first time, how foreclosure mediation can keep paying borrowers in their homes while saving billions of dollars for local governments and investors. The report concludes that allowing homeowners to face mortgage servicers and their attorneys without third-party intervention is a recipe for disaster.

Rebuilding America: How States Can Save Millions of Homes Through Foreclosure Mediation calls on all states to adopt strong foreclosure mediation programs. The report reviews existing programs in 19 states and makes recommendations for best practices for all states to adopt, using foreclosure mediation data from the last three years to draw its conclusions. The report includes examples of programs that are more successful (Connecticut, Nevada, and New York) and those that are less so. Judicial enforcement of mediation program requirements in several states is also included.

The NCLC website also includes information regarding court decisions, pending mediation state legislation, model documents and a summary of all current state programs as well as a link to each program. 

Chris Peterson on How to Regulate High-Cost Small Loans

Christopher Lewis Peterson of Utah (and a CL&P blogger) has written 'Warning: Predatory Lender' -- A Proposal for Candid Predatory Small Loan Ordinances, 69 Washington and Lee Law Review (2012).  Here's the abstract:

Over a hundred different local governments around the country have adopted ordinances restricting high cost, small loans. This trend reflects the solid majority of the American public that opposes the legality of triple-digit interest rate loans and the long historical tradition of treating “payday” and car-title lending as a serious civil offense or even a crime. Nevertheless, perhaps owing to limits on municipal power, local payday lending law has generated relatively little scholarship or commentary. This paper describes the existing local law governing small, high-cost consumer loans and proposes a more emphatic ordinance that better reflects the policy judgment of many local leaders and a solid majority of the America public. In particular, this paper (1) introduces the historical background of regulation of usurious lending; (2) analyzes the recent growth in local ordinances attempting to control small, high-cost loans; (3) discusses the evidence of market failure in the small high-cost loan market; (4) proposes a model ordinance requiring that lenders who offer loans in excess of 45% per annum display a cautionary message that reads: “Warning: Predatory Lender,” on their street, storefront, and other on-premises signs; and, (5) argues that the well-established municipal authority over signage provides a solid statutory and constitutional basis for such a law. An appendix with a model ordinance suitable for adoption by most local governments follows.