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Debt Settlement Programs Increase Financial Risks to Vulnerable Consumers

July 30, 2014 Comments off

Debt Settlement Programs Increase Financial Risks to Vulnerable Consumers
Source: Center for Responsible Lending

A new report from the Center for Responsible Lending (CRL) finds that the debt settlement remains a risky strategy for debt reduction – and often leaves consumers more financially vulnerable.

Debt settlement companies offer the promise of settling a consumer’s debt for a fraction of what they owe. The idea is simple: debt settlement companies offer to negotiate down the outstanding debt (usually from credit cards) owed to a more manageable amount so that a consumer can become debt free. Unfortunately debt settlement carries significant risks that may result in consumers becoming even worse off.

Debt settlement is inherently a risky venture: in order to enroll into debt settlement programs, consumers are required to default on their debt which often results in fees, increased interest rates, and sometimes even lawsuits from creditors. Even after assuming all this risk, consumers are offered no guarantees; in fact, some creditors refuse to negotiate with debt settlement companies at all. Even if a settlement is reached, a consumer unable to keep up with the new settlement arrangement risks falling back into default – and now without the fees paid to the debt settlement company for negotiating the agreement. CRL finds that consumers must settle at least two-thirds of the debt they enroll in a debt settlement program to benefit, a result that many will not achieve.

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The State of Lending: Payday Loans

September 19, 2013 Comments off

The State of Lending: Payday Loans
Source: Center for Responsible Lending

Payday loans—high-cost, quick-fix loans that trap borrowers in debt by design—cost cash-strapped American families $3.4 billion in fees every year. Of that number, more than two-thirds—$2.6 billion–is a direct result of churning borrowers into loan after unaffordable loan. This churning dramatically increases payday lending fees without providing borrowers with access to new credit.

Payday loans have multiple features that make them dangerous for borrowers: a lack of underwriting for affordability; annual percentage rates (APR) averaging 300%; a quick repayment period of their next payday, at which time the loan is due in full; and collateral provided by personal check, which gives lenders direct access to borrower bank accounts. Further, payday loans are simply unaffordable: A typical payday borrower making $35,000 annually does not have enough income to repay their loan and cover other monthly expenses, and subsequently is caught in the payday lending debt trap for months at a time.

Twenty-two states, including the District of Columbia, have significantly curbed this debt trap for their residents, either by eliminating predatory payday lending altogether, or by limiting the number of loans a borrower may take out in a year. CRL’s latest findings—including that 85% of payday loans go to borrowers with seven or more loans per year—underscore long-term, repeat borrowing as the core of the payday lending business model. The time to stop debt-trap lending is now, and the report concludes with recommendations for ways state and federal policy makers can do so.

Triple-Digit Danger: Bank Payday Lending Persists

March 21, 2013 Comments off

Triple-Digit Danger: Bank Payday Lending Persists
Source: Center for Responsible Lending

Banks pitch payday loans as short-term borrowing that allows their customers to deal with a financial emergency, repay the loan, and move on. In fact, CRL’s research shows that their triple-digit interest rate loans trap borrowers in a long-term cycle of repeat loans.

Banks that market payday loans continue to claim that these products are intended for short-term emergencies rather than long-term use, but this report shows that short-term loans are not typical. Although some participating banks have made small, recent changes in the product, bank payday loans are continuing to trap borrowers in high-cost, triple-digit debt.

Key Findings

  • Bank payday loans carry an annual percentage rate (APR) that averages 225 to 300 percent.
  • In 2011, average bank payday borrower took out 19 loans.
  • Bank payday borrowers are two times more likely to incur overdraft fees than bank customers as a whole.
  • Over one-quarter of all bank payday borrowers are Social Security recipients

Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders

May 12, 2012 Comments off

Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders
Source: Center for Responsible Lending
From press release:

Credit card losses in the current downturn mounted faster at banks using unfair, deceptive card practices, new CRL research finds. That’s because high-cost penalty fees and interest rates were not used to mitigate risk—as credit card issuers claimed—but instead were the risk that led to higher default rates. Read the report, “Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Lenders.”

In addition to showing that practices that hurt consumers also hurt credit card issuers, the study finds:

  • Bad practices are a better predictor of consumer complaints and an issuer’s losses during a downturn than an institution’s type, size or location.
  • Consumer safeguards on credit cards enhance banks’ financial health, contrary to issuers’ past claim that safeguards undermine it.
  • Credit card issuers with higher loss rates before the recession did not on average have a bigger jump in losses during the recession, indicating that having more high-risk customers did not predict which company’s problems would grow fastest.

New credit card rules have curbed or ended many of the unfair practices the study examined, such as doubling interest rates on existing balances for being a day late in making a payment. But some persist, and none of the new rules apply to business credit cards. Regulators need to better police those areas.

Government-mandated down payments would block creditworthy home buyers

March 11, 2012 Comments off

Government-mandated down payments would block creditworthy home buyers
Source: Center for Responsible Lending

As federal regulators consider setting down-payment standards on new mortgages, a new study shows such rules could push 60 percent of creditworthy borrowers into high-cost loans or out of the market altogether.

A proposal by regulators to define a high-quality mortgage as one with at least a 20 percent down payment, or possibly 10 percent, would hobble a healthy segment of the housing market. While higher down payments do result in fewer defaults, the payoff is small relative to the number of creditworthy households who could be shut out of the market, the study shows. For the full study, go to www.ccc.unc.edu/QRMunderwriting or www.responsiblelending.org/mortgage-lending/research-analysis/balancing-risk-and-access.html.

The results are particularly striking for African-American and Latino home buyers. A mandatory 20 percent down-payment requirement would exclude about 75 percent of African-American and 70 percent of Latino borrowers who could be successful homeowners from obtaining fairly priced mortgages.

Credit Card Clarity: CARD Act Reform Works

February 20, 2011 Comments off

Credit Card Clarity: CARD Act Reform Works
Source: Center for Responsible Lending

CRL’s study shows that the Credit CARD Act of 2009 has reversed much of the unclear pricing on credit cards, without leading to higher rates or more difficulty in getting credit.

These findings refute claims made by opponents of the credit card reforms. “People mistake higher rates on mail solicitations and other offers in the last year as a price hike,” said CRL senior researcher Josh Frank, author of the report. “But the facts show that offers now just more closely match actual costs. Prices have been level, but borrowers have a much better picture of what those prices are.”

The increased transparency documented in the report reverses a trend of increasingly unclear pricing that for years misled consumers into believing they would pay less for credit card debt than was true.

The difference between the stated rate on credit card solicitations and the rate consumers actually paid widened to unprecedented levels by 2004 and stayed at those levels through 2008. This difference narrowed markedly in the wake of CARD Act reform: Stated prices on solicitations have moved much closer to actual prices, which have remained steady.

+ Executive Summary (PDF)
+ Full Report (PDF)

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