By Hunter Davis, a Summer 2015 Leadership Conference Education Fund Intern
Earlier this month, the Center for Responsible Lending (CRL) held a briefing – and released a groundbreaking new report – on the cumulative costs of abusive lending, a broad term that includes a variety of loans such as student, payday, and car title loans. What distinguishes abusive loans from responsible ones is a lack of transparency concerning the risks associated with taking out a loan and a lack of consideration concerning the borrower’s ability to repay the loan. Combined with high interest rates and hidden fees, abusive loans often force the borrower to take out additional loans in order to make their existing payments, spurring on an endless cycle of debt.
Why would an individual choose to take such a risk? The fact is, many people don’t have a choice. Marceline White of Moving Maryland Forward Network moderated the briefing and pointed out that many individuals who are desperate for short-term cash and are unable to meet qualifications for a responsible loan have no other choice. After an individual exhausts their savings, assets, and other potential lenders, few options remain. And according to a recent survey from the Federal Reserve, two-thirds of Americans making under $40,000 per year would either have to sell something or borrow money in the event of an emergency expense of at least $400.
Also troubling is that in 2013, White households had 13 times the median wealth of Black households and 10 times the median wealth of Hispanic households – both which are higher than 2010 levels, according to Pew Research Center.
With this in mind, it’s hardly surprising that low-income people of color are the most frequent victims of these types of loans. People of color are two to three times more likely to be the victim of a predatory loan, exacerbating the racial wealth gap. As CRL President Mike Calhoun stated, “the difference between a fair and affordable loan and a predatory loan often becomes the difference between achieving greater prosperity and falling into a cycle of unending debt.” As they struggle to pay back high fees and associated interest, borrowers are unable to save money, hindering upward mobility.
While detrimental to individual families and communities, predatory loans are very lucrative for the lender. Every year, borrowers pay at least $2.6 billion in the form of payday loans alone; the costs of all types of predatory lending practices are virtually incalculable, according to the CRL report.
One solution to this problem lies in the forging of robust alliances. For example, diverse faith groups have weighed in, and their stance could be a useful tool in reaching out to conservatives, who as Rep. Keith Ellison, D. Minn., pointed out, will be key to addressing these problems.
However, as several panelists indicated, outlawing abusive loans is insufficient, as it will leave hordes of desperate Americans without any means of accessing loans. Ellison plans to advance a bill to comprehensively solve this problem. The focus will be on helping people gain credit and improving their credit scores in order to make fair loans more widely accessible. While outlawing abusive loans is an important first step, acknowledging the implications of a deterrence-based approach and planning accordingly is crucial in formulating effective policy.