Predatory Financial Practices
Research by the Center for Responsible Lending is showing that it isn’t just one type of loan doing the damage but a combination of loans. For instance, a predatory mortgage can lead a family to payday loans, etc. That results in a perfect financial story as debt cascades from different kinds of loans.
It is obvious that there are two tiers of financial services. One, where people can go and get car loans, home loans, etc. at reasonable rates and with opportunities for adjustment in the event of financial difficulty. These tend to be provided by local banks. The other is, to be blunt, predators profiting from many individuals inability to access regular financial services like banks.
Business ethics does not have proper language to deal with these different kinds of financial services. The same words are used for predator and community benefactor. It should be obvious to all that providing a car loan at a reasonable rate is a benefit to the community. It means that a human has access to a vehicle and can pursue economic ends like having a job and buying groceries. A car in this case is a production good. It creates value. But a predatory lender siphons money out of the financially disadvantaged, those that cannot for one reason or another access regular financial services. It siphons money and instead of a valuable production good, we have limited production good always riding a narrow dividing line between benefit and deficit.
The report (discussed below) shows how different kinds of predatory lending combine to produce financial disaster. One bad loan leads to another.
In this country, we have a long history of limiting the power of lenders with anti-usury laws limiting the interest rates that can be charged. It is time to revive that tradition and begin once again the work of building a fair system of financial services devoted to building the American economy and not systematically draining the resources of the poorest among us.
Immediate Costs of Predatory Financial Practices Are Steep, But They Are Just the Tip of the Iceberg | Michael Calhoun
Since 2012, the Center for Responsible Lending (CRL) has been measuring the effect of different predatory lending practices in our State of Lending research series. We have shown that predatory mortgage terms result in higher rates of foreclosure; that certain auto lending practices result in racial discrimination; and that trapping people in debt is the payday lending business model. Our final chapter, The State of Lending in America and Its Impact on U.S. Households: Cumulative Costs of Predatory Practices shows lending abuses are inter-related and that they set off chain reactions that have long-term consequences, derailing economic opportunity for millions of Americans and weakening the U.S. economy.
Abusive loans do not exist in a vacuum and borrowers who fall victim to one abusive loan are more likely to fall victim to another. Our report finds that 54.5 percent of those who have had a car-title loan have also had a payday loan, and 62.8 percent of consumers who recently used a payday loan also have a credit card. The costs of abusive loans compound over time because loans with harmful features lead more often to defaults, bankruptcies or the loss of a critical asset such as a car or home.