Predatory Lending – Part IV

This week we’ll return to our discussion on predatory lending and discuss refund anticipation loans and checks.

Refund anticipation loans are short-term cash advances made against an anticipated income tax refund. Tax filers are given a lump sum early and are asked to repay that loan, with interest and fees, once they receive their tax refund. These loans often have high fees and APRs above 100%, and borrowers may receive their money only a week or two before they receive their tax refunds.

As of April 2012, FDIC-insured banks are no longer allowed to offer refund anticipation loans, but less regulated financial institutions and certain tax preparation companies often can. Starting in 2013, many refund anticipation loans were replaced by refund anticipation checks.

Refund anticipation checks are temporary bank account set up for tax filers, where filers do not have to pay for their tax preparation and filing fees up front and instead pay those, along with a refund anticipation check fee, once they receive their tax return. These fees typically cost anywhere from $25 to $60, and along with excessive filing and tax preparation fees, can rob low-income tax filers of hundreds of dollars at tax time. Limited-resource households, as well as families who rely on the Earned Income Tax Credit (EITC), are particularly vulnerable to this predatory practice, many of which are eligible for free tax preparation and filing through VITA sites and other resources. For more information on VITA, be sure to visit irs.gov.

Next week we’ll return and discuss overdraft loans and rent-to-own contracts.

Predatory Lending – Part III

This week we’ll return to our discussion on predatory lending and discuss car title loans.

Car title loans involve cash advances in exchange for putting up your car as collateral. In order to be eligible for a car title loan, borrowers must have a free and clear title. Once they’ve appraised your vehicle’s value, the maximum loan amount is determined, generally for no more than a third or half of the value of the car, meaning borrowers are putting their vehicle at risk for a loan that is less than half of the car’s value. Loan terms are as short as one month with annual interest rates that are often in the triple digits!

In Virginia, there are a number of regulations aimed at limiting the impact of car title lenders. Car title loan interest cannot exceed 22% per month (which still equals an APR of 264%!), and loan terms must be for at least 120 days. Lenders cannot make car title loans to individuals who already have a car title loan outstanding, and car title loans cannot be extended without the lender filing the title of the borrower’s vehicle with the DMV. Payday lending companies that offer car title loans must do so from a separate location that does not offer payday loans; however, many predatory lenders have maneuvered around this restriction by creating separate locations next door to one another or in the same shopping mall.

Starting in January 2021, a number of new regulatory changes will be introduced to Virginia. Car title loans will be capped at 36% APR, and the minimum loan term will be lengthened to 6 months. Like payday lenders, car title lenders will be required to make an effort to ensure borrowers are financial capable of repaying the loan on time.

Next week we’ll return and discuss refund anticipation loans and refund anticipation checks.

Predatory Lending – Part II

This week we’ll return to our discussion on predatory lending and discuss payday loans.

Payday loans are short term, small cash advances of often $500 or less. Repayment is generally done through either postdated personal checks or authorization for automatic withdrawal from bank accounts. Payday loan fees can cost as much as 20% of the loan, and while they often need to have a term that’s at least as long as two pay periods, that means for those receiving weekly checks, they can be as short as 14 days. This can lead to excessively high financing costs, often equivalent to annual percentage rates well above 100%.

Looking at some statistics from 2015, four out of five payday loans are rolled over or renewed within just two weeks, largely because only 15% of borrowers are able repay all of their payday debt when it’s due. Also, three out of five payday loans are made to borrowers whose fees and interest will end up exceeding the amount they borrowed! In 2015 in Virginia, there were close to 200 payday lending locations that issued over 350,000 payday loans, for a total of nearly $140 million, an average of just over $350 per loan. These loans were issues to roughly 112,000 borrowers, meaning there were over 3 loans per borrower…in just one year! Also, the average APR for these loans were over 200%!

There are a number of payday loan regulations in Virginia aimed at limiting the impact of payday lenders. In Virginia, online payday loans are illegal, lenders are prohibited from lending to members of the military and their immediate family, and payday loans from a physical location cannot exceed $500. The terms of payday loans must be at least twice the borrower’s pay cycle, the APR is capped at 36%, and the loan fee cannot exceed 20% of the loan. However, for very short-term payday loans, like those with terms of just two weeks, this can still equal an equivalent annual percentage rate of well over 100%! Virginia payday loans cannot be rolled over and payday lenders cannot offer loans to borrowers who are currently in the process of repaying another payday loan. There are also further restrictions and mandated waiting periods for borrowers who have had five or more payday loans in a 6-month period and those who have repaid an extended term loan. Starting in January 2021, a number of new regulatory changes will be introduced to Virginia. Payday and short-term loans will be allowed up to $2500, however, the payday loans must have a term of at least four months, and payday lenders must make an effort to verify income and ensure borrowers are financial capable of repaying the loan on time. Towards the end of 2020, a number of federal regulations were introduced as well. Lenders can offer up to two extensions, but only if the borrower has paid at least a third of the loan, and lenders that unsuccessfully attempt an automatic withdrawal can only try one more time without explicit authorization from the borrower for additional attempts.

Next week we’ll return and discuss car title loans.

Predatory Lending – Part I

Over the next few weeks, we’ll discuss predatory lending, what it is, who they target, some of the predatory lending practices, and what alternatives exist.

First, what is predatory lending? This is a little more complicated than you’d think, primarily because there isn’t one definition agreed upon by federal laws, states, and regulatory agencies. However, there are a number of characteristics that are common among predatory lenders. One is excessive cost. Predatory lenders often charge interest rates and fees that far exceed reasonable compensation for the lender’s costs or risks. Another is a lack of underwriting, meaning the lender makes little to no effort to ensure the borrower has the credit, income, and assets needed to reliably repay the loan. Predatory lenders also rarely report their borrowers credit information to the credit bureau when they’re paying their debts on time and as asked, preventing borrowers from improving their credit through positive payment history. Instead, the only times these predatory lending products are typically reported to the credit bureaus is after the borrower defaults and their debt is in collections. Lastly, many predatory lenders provide products that are designed to keep borrowers on a “debt treadmill.” This is often done through creating excessively high cost, and short term loans that borrowers won’t be able to repay at maturity, forcing them to roll over or renew multiple times, adding more fees each time.

Who do predatory lenders typically target? Traditionally, low-income working consumers, especially those with little to no savings that live paycheck to paycheck, are the primary targets for predatory lenders, as evidenced by the clustering of predatory lending institutions in low-income communities. Young adults who don’t have established credit, much in savings, and little experience financially are also often targets. Many elderly consumers with limited resources, as well as young members of the military are frequent targets too. Lastly, predatory lenders tend to target borrowers that, whether it’s a lack of income, lack of credit, or poor credit, may not have access to other, less predatory financing options. Predatory lending is often a trap that presents a serious threat to low-income families, wreaking havoc on their finances.

Over the next few weeks, we’ll discuss various predatory lending practices, including payday loans, car title loans, refund anticipation checks and loans, overdraft loans, and rent-to-own contracts.