George Pope, a 62-year-old disabled man living in Queens is convinced by a smooth-talking mortgage broker to refinance his home at a rate of $535 per month. Pope, however, only receives $558 in monthly income from Social Security. Despondent, Pope recalls: “Not being able to read, I got a loan that was predatory and I didn’t know it.” He now faces foreclosure on his home.
Across the river in the Bronx, a 90-year-old woman testified to her local council in desperation, saying that her inability to make loan payments has put her on the verge of eviction. Both of these individuals are victims of what are known as predatory loan practices. Also known as subprime lending, these practices aim to extend lines of credit to individuals who are not likely to be able to pay these loans back. To offset this risk of default, predatory lenders often impose hefty interest rates and fees, often serving to financially cripple the recipient of the loan. Oftentimes fear, intimidation and even physical violence are used by these lenders to encourage repayment. It is time that governments, local and federal, take steps to curb these harmful practices.
As an industry, subprime lending saw a sharp increase in the years preceding the 2008 financial crisis. A dangerous combination of a low interest rate environment, soaring home prices and strong confidence in the economy led to a steady increase in subprime home loans. At its peak in 2006, subprime mortgage loans made up 23.5 percent of the entire housing market, according to a landmark report released by the Financial Crisis Inquiry Commission. As the crisis unraveled, the United States saw an unprecedented number of home foreclosures, in part a result of this reckless lending. As a result, five major U.S. banks (Bank of America, JP Morgan, Wells Fargo, Citigroup and Goldman Sachs) agreed to pay $32 billion to affected mortgage owners in 2012. Outside of housing, predatory “payday” lenders are still a staple of many American cities. These lenders offer high-interest, short-term emergency loans to individuals who are not likely to receive secured loans from a bank or another accredited lending institution. Evidently, those who end up using payday loans are underserved individuals. Additionally, according to a report by the Pew Charitable Trusts, African-Americans and Hispanics are almost twice as likely to use payday loans than white individuals. According to the same report, using even one payday loan can often lead to being indebted for months at a time due to the high interest fees. The payday loan industry as a whole is still relatively unregulated, and lenders spend over $7 billion annually on over 20,000 storefronts as well as online services. As the economy recovers and incomes rise, it is an opportune time to crack down on these practices.
Many steps have already been taken by governments and private institutions to combat predatory lending. For example, payday lending is legal in only 27 states with many local jurisdictions additionally setting interest rate cutoffs on these lenders. In New York, for example, two major statutes in the New York State Banking Law prohibit certain usurious practices for subprime lending for mortgages. Even non-profits and universities have taken steps against predatory lending. For instance, Accion, a non-profit, offers microloans, training and consulting services to impoverished individuals at affordable rates. Additionally, student groups at universities are targeting microfinance and education initiatives to steer individuals away from predatory loans. Lemonade Day D.C., a George Washington University student group, teaches middle schoolers about personal finance, lending and social entrepreneurship by showing them how to run a lemonade stand.
While initiatives are in place across the country, still more needs to be done. From a federal level, comprehensive legislation still has not been passed to explicitly target predatory lending practices. Although the U.S. Department of Housing and Urban Development has spearheaded significant research on the subject, tangible policy changes have not yet materialized. From a local level, legislators should conduct due diligence on the predatory lending environment in their district and sponsor bills to prevent further lending as well as supporting groups working to alleviate the prevalence of these lenders. Finally, education should play a huge role in decreasing the number of people who turn to subprime lenders in the first place. Personal finance education at a young age would be instrumental in informing people about the dangers of these loans and alternative options they may have. While eliminating predatory lending entirely is unrealistic, many steps can be taken to ensure these practices fail to perpetuate the cycle of poverty further.
Agastya Mondal is a senior applied mathematics and biomedical engineering double major from Pennington, N.J.
