Friday, October 21, 2011

The First State to Pass an Anti- Predatory Lending Bill

This is the third post in a series on the poverty industry and Gary Rivlin's book Broke USA.

As Martin Eakes and Self-Help began fighting predatory lending, they met many others who were passionate about reining in subprime lenders and protecting the working poor. Broke USA describes how Self-Help formed a coalition with other organizations to pass an anti-predatory lending bill for North Carolina.

Peter Skillern is an activist from Durham, NC and the executive director of the Community Reinvestment Association of North Carolina, or CRA-NC. He was particularly anxious to get involved because he was aware of a lender who was very close to home, NationsBank in Charlotte. He said NationsBank had a “parallel banking system.” If you were white, middle class, and had good credit, you were taken through one system. If you were lower income and had imperfect credit, you were led to either NationsCredit or EquiCredit, one of their two subprime subsidiaries.

Bill Brennan, an attorney from the Atlanta Legal Aid Society, became another major ally. He had been fighting subprime lending since 1991 and had testified before Congress and the Fed multiple times. Brennan was able to broadcast several human interest pieces on the Atlanta local news and Primetime Live that featured hard working people who had lost nearly everything to subprime lenders. Brennan sent tapes of all of these broadcasts to Martin Eakes who was determined to show them to all 120 members of the North Carolina state assembly.

Mike Calhoun, who works for Self-Help, drafted the legislation with an aim to impose limits on what a subprime lender could charge its customers. The bill was sponsored by Roy Cooper, the senate majority leader at the time and the current state attorney general. Lobbyists weighed in and discouraged senators from co-sponsoring the bill, leaving Cooper as the sole sponsor. Cooper explained that, “North Carolina is the second largest banking state in the country, so the banking industry is a significant engine here. They had a significant influence over the legislature and government process.”

The political fight over this bill lasted for more than a year. Modifications were made, but the legislation banned prepayment penalties on any mortgage less than $150,000 and made it illegal to roll the cost of credit insurance into the loan. While lenders could still charge interest rates above rates given to prime customers, anyone signing a deal that would have them pay interest rates more than ten percentage points higher than a Treasury bill would be required to meet with a credit counselor.

The bill was signed into law July 1999 and was hailed by consumer advocates as a significant breakthrough. Soon, activists from New Jersey, Chicago, and Dayton were calling, eager to pass a similar bill.

What do you think of this legislation? Did the modifications weaken it too much, or was the state overreaching by passing this bill? Let us know what you think!

Thursday, October 20, 2011

Leading Up to the Big Fight

This is the second post in a series on the poverty industry and Gary Rivlin's book Broke USA.

The state of North Carolina has led the fight against the poverty industry, thanks to Martin Eakes, the founder of the Center for Responsible Lending. When Eakes began his career by starting Self- Help in the 1980’s, he never imagined it would take him to the forefront of the fight against the poverty industry. In Broke USA, Gary Rivlin provides commentary on how Eakes was motivated to help the working poor create wealth.

While serving the working poor throughout the mid 1980’s, Eakes discovered that the average white family had a net worth of $44,000 while the average black family had a net worth of under $4,000. The real issue was equity, which proved the importance of owning a home. Self- Help was able to help these families purchase homes valued between $30,000 and $50,000 by providing them with a loan almost as favorable as their prime counterparts. Borrowers from Self-Help paid an interest rate about a percentage point higher than the going conventional rate and a fixed 1 percent in fees and points. Eakes found that this was more than enough to compensate for the additional risk of lending to families of moderate income.

Self- Help was so busy serving the working poor that it wasn’t until Freddie Rogers walked into their office in 1998 that they realized industry how much the industry had changed. Rogers owned a home but was talked into refinancing by a company called Associates when he needed money to repair a drainage problem in his basement. Under his new loan with Associates, Rogers was paying 13.7% interest and now owed $47,500 when he had previously owed much less. Self- Help quickly realized that Freddie Rogers’ case was not an isolated incident; there were many more cases just like his.

After much internal debate about whether Self-Help should fight Associates, they decided they had no choice because of its sheer size. While Self-Help only had half a dozen store fronts across North Carolina, Associates had eighty. Associates also had Terry Bradshaw pitching its loans on TV, and they were generating nearly $1 billion a year in profits. Self-Help decided that if they didn’t address predatory lending, they would not really be achieving anything by putting people in homes. Self-Help, who had always been focused on helping families build wealth, decided it was equally important to help families protect their wealth as well. To do this, North Carolina needed to become the first state to pass an anti-predatory lending bill in the country.

Do you think Self-Help was right to fight Associates or did they overstep their boundaries? Let us know what you think, then check back to learn how the fight developed!

Monday, October 17, 2011

The Poverty Industry

This is the first post in a blog series providing commentary on Gary Rivlin's book Broke USA and the poverty industry.

You may not realize it, but the poverty industry is all around you. The business of making money off of the poor has always existed, but it didn’t become a multi- billion dollar industry until the 1980’s. I recently read Broke USA by Gary Rivlin which provides a commentary on how the poverty industry turned the working poor into big business.

The poverty industry consists of check cashers, payday lenders, pawnshops, rent-to-own furniture and appliance stores, and other businesses that make money off the impoverished and working poor. The industry is very profitable. In 2008, payday lenders charged their customers a collective $7 billion in fees and the country’s rent-to-own shops took in about $7 billion in revenue. The same year, pawnbrokers booked about $4 billion in revenue and check cashers $3 billion. Add businesses like auto title lenders and tax preparers that offer instant tax refunds, and the total adds up to $25 billion. That is a staggering figure.

Most of these businesses make money by charging exorbitant interest rates on the loans they provide to the working poor. For example, payday lenders and title loan shops are known to charge close to 400%. Other lenders charge excessive fees for mortgage refinancing and home equity loans. Rivlin tells the story of Lillie Mae Starr, a retired factory worker who borrowed $5,000 to fix her windows. Ms. Starr was paying 23.3 percent interest, and fell behind in her payments. After refinancing twice, she owed Fleet Finance $63,000.

The most angering part of the poverty industry is its predatory nature. Gail Kubiniec ran a CitiFinancial branch that was engaged in predatory lending, and she claimed to boost revenues by packing loans with unnecessary insurance policies. She said, “The more gullible a consumer appeared, the more coverage I would try to include in the loan.” She defined a gullible customer as someone who was very young or old, a minority, or someone who appeared uneducated and inarticulate. The industry preys off vulnerable people that are trapped in poverty.

The poverty industry is typically concentrated in certain neighborhoods and shopping centers. For example, a pawn shop will be next to a rent-to-own store which will be next to a payday lender which will be next to a tax preparer that offers instant refunds. See the pictures below to see how this is true in Forsyth County.

The Rent-A-Center is in the same shopping center as the Professional Tax Service that offers fast cash.

The Quick Cash Pawn Shop is across the street from the Rent-A-Center.

While the poverty industry is still extremely profitable, more people have taken notice of its predatory and abusive nature. What do you think about the poverty industry? Is it in your neighborhood? Have we done too much to rein it in or not enough? Let us know what you think, then check back to learn what steps North Carolina has taken!