Press Releases:
A PREDATORY LENDING PRIMER
Predatory lending in the United States takes many forms. Among the most prevalent:
Sub-prime home mortgage and refinance loans
Home buyers with poor credit histories, sporadic employment, high personal debt ratios or bankruptcies often find their “loan-worthiness” limited to the sub-prime mortgage and refinance sector. Such loans generally include higher interest rates, based on the assertion of lenders that sub-prime borrowers represent greater financial risk.
Most consumer advocates agree that sub-prime lending is not necessarily predatory. However, such financing takes on predatory characteristics once lenders begin attaching significant — and often hidden — fees and penalties to the loan, misrepresent details of the loan to the borrower, or process the loan without regard to the borrower’s ability to repay. Advocates note that such practices in the sub-prime market have grown significantly in recent years, resulting in dramatic increases in foreclosures, particularly among low-income and elderly borrowers.
Paycheck advance lending
Paycheck advance lending services offer employed borrowers’ small, short-term cash advances, often up to $500. The borrower provides the lender with a postdated personal check and receives cash, minus the lender’s fees.
The check is held by the lender for a specified period of time (usually one or two weeks) at which time the borrower has the option of paying in cash the total due on the check, allowing the lender to deposit the check, or renewing or rolling over the loan for an additional time period if the borrower is unable to repay the loan. The latter option generally incurs additional fees for the borrower, even if no new funds are loaned.
While supporters of such loans point to their convenience for individuals who need quick, onetime financial assistance, consumer advocates note that many low- and fixed-income borrowers often find themselves renewing the loans over and over again, eventually facing annual interest charges that can easily top 400 percent.
Income tax anticipation loans
Income tax anticipation loans, offered by many tax preparation services, are short-term cash advances made against a consumer’s anticipated income tax refund. Borrowers relinquish their refund to the lender in exchange for the cash equivalent, minus the lender’s fees.
Consumer advocates note that such loans increasingly are made to low-income individuals in connection with their earned income tax credits (EITCs). The EITC reduces or eliminates income taxes owed by many low- and moderate-income working families. In cases where the calculated credit exceeds the tax owed, the EITC provides a wage supplement in the form of a tax refund. EITCs are widely hailed as a critical success in helping lift individuals and families above the federal poverty line.
Issuing such loans against EITC-based refunds defeats the program’s purpose of trying to provide more income to low-income families.
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