(Most recent update 6/19/08). Look for the graphic.

Local League Study: Lending Industry Practices

Predatory lending is called a growth industry. It is growing rapidly nationwide and taking wealth out of families and communities -- usually those that can least afford the loss.


It is difficult to define a predatory loan. However, if we look at it the way a consumer would, it is any loan that takes advantage of consumers by selling them a loan product that is unsuitable for them. It is unsuitable because it is more expensive than necessary, for example. Predatory loans are secured by the consumer's house. Predatory loans may be first mortgages but what is more likely is that it is a refinance loan, home equity loan to take cash out of the property, debt consolidation loan or home improvement loan.


The debt consolidation loans and the home equity loans are most often loans turning unsecured debt (credit cards, medical bills) into debt secured by the consumer's home putting the home at greater risk.


Home loans are regulated by the Wisconsin Department of Financial Institutions and by federal agencies. There are local and national efforts to deal with predatory loans legislatively. Several states have laws regulating predatory lending. Most do not. There is a growing effort at the national level to have Congress pass regulatory legislation.


The history of how the study on Lending Industry Practices was split, and information on the first half of the study, "convenient lending", follows on this page.




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When we use the term "predatory lending" for the purposes of this study, it means large loans for which the borrower's home is the collateral.


Convenient lending, primarily payday lending is also a growth industry. It is growing exponentially. Convenient lending in Wisconsin is unregulated. Convenient lending includes pawn brokers, payday lenders, car title lenders, refund anticipation loans, pay stub loans, holiday loans and check cashing businesses. Pawn brokers are limited to a 36% APR interest rate and are regulated. The other types of convenient lending are not limited to any interest rate.


Payday lending is the most well-known of the convenient lenders. The people most likely to use payday lenders are single moms. Consumers are encouraged to roll over what they owe into a new payday loan. That typical consumer rolls over the payday loan 8 times. (national data) The way that payday lenders operate, the APR (annual percentage rate) interest ranges from 390% to over 700%. It has been suggested that payday lenders are filling the niche formerly held by loan sharks making the kind of small loans that banks won't. It is estimated that payday lenders make 99% of their profit from repeat borrowers.


There are efforts, with mixed results, to legislate some sort of regulation of payday lenders. Eleven states ban payday lending. WIsconsin does not. Nor does Wisconsin set any kind of interest rate cap on loans.


(Scroll down for links to reports, press releases and other materials.)




Policy Recommendations on Predatory Lending Part 2 of Study - Predatory Mortgage Lending

1. Verification of borrower income.
2. Full disclosure of the cost of the loan – monthly and lifetime.
3. Terms appropriate to the borrowers ability to make monthly payments.
4. Debt equal to or less than the home’s current value
5. Clear limits on prepayment penalties.
6. Escrow fund for property taxes and insurance.


Support a legal ban on two industry practices – yield spread premiums and preforeclosure conveyances.
Support home ownership classes for first-time buyers to foster consumer responsibility.
Support that all parties who profit from mortgages have a fiduciary duty to consumers and should be held legally accountable. This includes the loan originator, the originator’s company/institution, funding sources, underwriters, mortgage purchasers, rating agencies, trust officers, regulators and loan servicers.
Support for clear industry standards, including competency test, certification and continuing education requirements for all loan originators, mortgage brokers, independent mortgage companies and banking affiliates. The mortgage industry requires governance.


Approved by Wisconsin League of Women Voters at the annual meeting, June 7, in Madison, Wisconsin




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If you want to go directly to the articles and other materials on the second half of the study, "predatory lending" Click Here . Included with the material on predatory lending is a short glossary of terms. Although reading the articles may make the glossary unnecessary for you.




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League Studies: General Considerations

When you do a study in League..you are to start with no preconceived position. What you do is gather information, have the committee review and discuss it, and then make sure all other League members have pertinent information. The committee then can put out discussion questions at the meeting to insure that discussion covers all sides of the issue. Then a few consensus questions are posed and these are done in a neutral fashion or at least always allowing the dissenting view. This is the manner in which we arrive at the sense of the group.




Important: Division of Study

We have decided to split the study into two parts. It is easy to identify and define convenient lending so we are taking on that aspect first. We hope to develop a consensus this April.


The links here are doc files, PDF files which require Acrobat Reader or web page (html) files which will open your browser so you can see them. These are roughly in date order starting with the newest first. If you would like a CD with all these files on it, please use the League contact form to request one.




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The opinions expressed in the articles and study documents are the author's and do not represent a position of the League of Women Voters of Milwaukee County.




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Downloads: Articles, Reports & Papers for Convenient Lending Part of Local Study

A New Wrinkle on an Old Familiar?

Here is a recent article about a new online payment "plan" that disguises itself almost as another Paypal. BillMeLater with Amazon.com as a big investor can committ the unwary to a credit plan with a 19.99% interest rate. (Paypal works more like a pre-paid credit card.) The way BillMeLater works on the unwary is that it is so simple to sign up. The article from Cnet advises against using BillMeLater.




Payday Loans

1. The Cities of West Allis and Wauwatosa in Milwaukee Coounty have both adopted ordinances dealing with payday lenders. Each defines payday lenders. The West Allis ordinances use the zoning authority of the city to limit the distance between payday lending stores to 3,500 feet. The second ordinance in West Aliis makes it clear that payday lenders are undesirable and that there is a need for State legislation to adequately protect consumers.

   
   

2. The Ordinance adopted by the City of Wauwatosa is covered in their page with links to meeting minutes. The City of Wauwatosa enacted a one-year moratorium on payday lenders in the City. The moratorium was adopted by the Wauwatosa Common Council in November 2006. For the timeline on Council actions regarding payday lenders see the City of Wauwatosa web site The Wauwatosa Ordinance set distance requirements of one "convenient lender" from another and also sets minimum requirements for hours of operation, lighting, certain design aspects of the building. The entire Ordinance is included in the August Council minutes at the Wauwatosa web site.

   
   

3. To see how quickly the interest adds up on a payday loan, use this handy calculator from the Consumer Federation of America. This does include the costs rolling the loan over or taking out more than one loan at a time. You are asked to estimate how many loans you expect to take out in a year. The natural tendency is to estimate low.

   
   

4. The City of Milwaukee Task Force on convenient lending, which concluded its year-long study in May, 2006, has a full report with attachments online at the City of Milwaukee web site. When you get to the site enter #050489 in the search box. The advantage of download from the City site is that you can choose to download only the final report with its recommendations or any of the exhibits separately.

   
   You can also download a copy of the CIty Task Force on Convenient Lending Final Report here. It is a large file containing all the exhibits, and will take a while if you have dial-up internet. The file contains an opinion from the City Attorney as to what the City can or cannot do to regulate payday lending. Please read at least the summary of the report including recommendations.
   Here is a one-page summary of the recommendations of the City of Milwaukee Task Force.

   
   

5. Geography Professor Steve Graves prepared this map of payday loan locations in 2007. Note that the industry is concentrated in a few states and that there are few or none in the upper New England, PA, WV, GA and NC. In those states due to state legislation that sets interest rate caps or otherwise regulates these businesses. Even with controls consumers apparenly do not have difficulty meeting their need for small loans. This map is provided by Jim Walrath.

   
   

6. National Public Radio has run pieces on convenient lending. Here is a podcast about the situation in New Mexico where some legislators are trying to pass restrictions on payday loans. You will probably need a high speed connection to the internet.

   
   

7. The Center for Responsible Lending has published probably the most current information on the effects of payday lending in Financial Quicksand: Payday Lending Sinks Borrowers in Debt With $4.2 Billion in Predatory Fees Every Year

   
   

8. The Filene Institute (Madison) has published a report on ways to reach low-wealth households. The report Real Solutions Toolkit contains useful information for credit unions in Wisconsin on how to, among other things, compete with payday lenders.

   
   

9. An organization called Payday Loan Industry Watch has a set of very good tips on payday loans at their web site. Some of these apply to car title loans as well.

   
   

10. The State of Georgia banned payday loans because of the clustering of payday lenders around military bases. On February 16, 2007, this article, Georgia Debates Restoring Payday Loans with Limits, was published in American Banker (provided by Bethany Sanchez, Metro Milwaukee Fair Housing Council).

    
    

11. The Washington Post has run recent (2/07/07) articles about the advertising camapaign of the payday industry. From study committee member, Matt Plummer (Aurora Family Service) comes the first article Please Act Responsibly Most of the Time From committee member, Leon Burzinski (Wisconsin Alliance for Retired Americans), is this Washington Post regarding the new tv advertising campaign developed by payday lenders. Payday Loans: Costly Cash

    
    

12. Bethany Sanchez (MMFHC) provided an interesting article about the profitability of alternatives to payday loans from the December 18, 2006 issue of American Banker. Are Payday Alternatives Worth Effort? The question of how realistic the alternatives to payday loans are is discussed by the banking industry.

    
    

13. Bankrate.com is an online service which posts articles about the financing industry. In November, 2005, an article titled: Online Payday Loans: Borrower Beware by Laura Bruce of Bankrate.com was posted. It warns about the rapid increase in online lenders and the probability that the lender is a scammer. Once the consumer turns over their personal information -- where does it go?

    
    

14. A 55 page National Consumer Law Center report on payday loans by state: Updated Summaries of State Payday Loan Laws November 2005. Note that Wisconsin has no laws regarding payday loans. Bankrate.com has posted a chart which shows state-by-state information in an easier to read format

    
    

15. The Consumer Federation of America has a separate section on their web site dealing with payday lending. One Payday, Many Payday Loans: Short-Term Lending Abuse in Milwaukee County dated 2005, is one of the reports on their web site.

    
    

16. The Center for Responsible Lending and the Consumer Federation of America jointly released a report, Car Title Lending: Driving Borrowers to Financial Ruin, April 14, 2005. Car title loans share many of the charachteristics of payday loans.

    
    

17. After collecting data from more than 13,000 zip codes across the country, Christopher L. Peterson, University of Florida law professor and Steven M. Graves, geography professor at California State University, found payday loan operations clustered in areas near military bases. Here are the press release and the report on the location study itself, The Law and Geography of "Payday" Loans in Military Towns

    
    

18. Here is a Model Deferred Deposit Loan Act prepared by the National Consumer Law Center. This pertains to payday loans and is a suggested model of a law that could curb the abuses of the lending industry. This report Predatory Small Loans A Form of Loansharking: The Problem, Legislative Strategies, Model Act gives a detailed explanation of the Model Law and is also from the National Consumer Law Center.

    
    

19. In September 2003 the State Attorney General of New York sued payay lenders which were using out of state banks to make expensive payday loans in New York. This press release about the lawsuit is very useful because it addresses many of the problems of payday loans, introduces terminology and shows how easy it is to do an "end run" about the state's law. New York Lawsuit. Included with the press release on the lawsuit is a "tip sheet" about payday lending. It contains a good definition of payday lending and useful information for consumers. Payday loan tip sheet including a clear definition of payday loans.

    
    

20. The first quarter, 2002, report of The Federal Reserve Bank of Philadelphia contains an article about payday lending: No Cash 'Til Payday: The Payday Lending Industry The short article contains the names of companies making payday loans and information about the activity in other states.

    
    

21. Faculty and researchers at the University of North Carolina have produced some of the first and best studies of payday lending. Links between the growth of indebtedness and small, short-term loans are explored in Payday Lending: A Business Model that Encourages Chronic Borrowing (2003). In 2001, the Institute of Government at the University of North Carolina at Chapel Hill pblished The Public Policy Challenges of Payday Lending.

    
    

22. Also from North Carolina in 2001 came a short book by the Community Reinvestment Association of North Carolina Too Much Month at the End of the Paycheck. This piece looks at lending from the consumer viewpoint and includes math problems for borrowers.

    
    

    Payday Lenders' Trade Organization and Arguments in Favor of Payday Lending

23. Dr. Thomas Lehman, PhD. provided a guest column for a newspaper Let's Repeal Rules that Restrict Competition, December 5, 2006.

    
    

24. There is a trade organization for payday lenders which has its own web site. The materials they have online are brief and quick to read. Community Financial Services Assn. of America

    
    

25. Committee member, Sue Lindberg (LWV) decided to think like a payday lending and come up with arguments in favor of the business. Read her thoughts.

    
    

26. Dr. Thomas Lehman has written many articles in support of payday lending. In this article he critiques the report Race Matters from the Center for Responsible Lending. Here is a short, 2-page synopsis of the article. Both of these items are found on the "Rent to Own" web site.

    
    

27. This article provides current information on the response of the payday loan industry to criticism. Payday Lenders Strike a Defensive Pose (Wall Street Journal), February 21, 2007.

    
    

28. William O Brown, PhD at the University of North Carolina and Charles B Chushman, PhD at the George Washington University wrote a paper Compensation and Short-Term Credit Needs of U.S.Military Enlisted Personnel pointing out benefits of payday loans for military personnel.

    
    

29. Here is a 2006 podcast of Dr. Thomas E. Lehman talking about payday lending, elaborating on his 2003 essay. For the podcast you really need a high speed connection to the internet. The text of his 2003 essay about payday lendingon which the podcast is based is included here.

    
    

30. The Credit Research Center, McDonough School of Business, Georgetown University, Washington D.C., has published papers regarding payday lending. Monograph #35, published in 2001, Payday Advance Credit In America: An Analysis of Customer Demand analyzes just what it says. The reason it is listed here is that much of the funding for the Center comes from the lending industry. This is a 94 page report.

    
    

31. A candidate for mayor in Philadelphia was once a payday lender. This February, 2007 article describes his approach to payday lending. Knox Defends Payday Loans From Bethany Sanchez (Metro Milwaukee Fair Housing Council).

    
    

    Refund Anticipation Loans (RALs)

32. The Consumer Federation of America (CFA) and the National Consumer Law Center (NCLC) collaboarated on this recent press release on Refund Anticipation Loans (RALs): "Down But Not Out: Quick Tax Refund Loans Continue to Gouge Taxpayers and Military"February 5, 2007

    
    

33. Here is a sample of a refund anticipation loan brochure for the current tax season.

    
    

34. The Consumer Federation of America and the National Consumer Law Center have collaborated to produce a new RAL report One Step Forward, One Step Back; Progress Seen in Efforts Against High-Priced Refund Anticipation Loans, but Even More Abusive Products Introduced January 2007.

    
    

35. Pay stub loans are another way to encourage taxpayers to obtain their tax refund early. The National Consumer Law Center and the Consumer Federation of America released Consumer Advocates Warn Taxpayers Against New "Pay Stub" Refund Anticipation Loans(2 pages) dated November 26, 2006. They also jointly issued a longer report, Pay Stub and Holiday RALs: Faster, Costlier, Riskier in the Race to the Bottom, (11 pages) November, 2006.

    
    

36. Another press release from the CFA: Refund Anticipation Loans: Updated Facts and Figures, January 17, 2006

    
    

37. Pay stub loans are actually a form of Refund Anticipation Loan. Here is a press release from the National Consumer Law Center: Consumer Advocates Warn Taxpayers Against New "Pay Stub" Refund Anticipation Loans November 28, 2006.

    
    

38. An article from last fall from USA Today reports on specific cases of what happens when people obtain refund anticipation loans: Challenges Mount Against Refund-Anticipation Loans

    
    

39. A 31 page report from the CFA & NCLC contains valuable data on RALs. Picking Taxpayers' Pockets, Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing INto Low-Income Americans' Hard-Earned Tax Refunds January 2005

    
    

Check back for downloadable copies of the other materials we are using for this study. New materials will be added as the study committee progresses.

Useful Links

• Center for Responsible Lending is a consumer advocacy group in Durham NC. It is national in scope and has all kinds of information related to the lending industry.

  
  

• The Community Financial Services Association of American is a trade organization for payday lenders.

  
  

• Institute on assets and social policy is an Institute within Brandeis University which studies and makes recommendations on building assets.

  
  

• Payday Lending Industry Watch is an organization that claims to be objectively reporting on the payday loan industry.

  
  

• The National Consumer Law Center is a consumer advocacy organization that is a leading expert on low-income consumer issues.

  
  

• National Community Reinvestment Coalition is an advocacy organization concerned with fair lending practices.

  
  


Compiled, annotated and edited by Dorothy K Dean for the League of Women Voters of MIlwaukee County