Consumers skinned by predatory loans and drowning in harsh debt collection practices
The "affordability crisis" is really a predatory interest rate crisis
Affordability may be the buzz word of the moment in Washington but for most families, the staggering cost of credit and aggressive debt collection practices weigh a lot more heavily than the price of eggs.
Consumers too often wind up struggling with payday loans that carry predatory interest rates that amount to 400% or more and then face draconian collection practices that leave them with nothing to cover basic living expenses. Many wind up homeless as a result.
A measure introduced by Sen. Jack Reed (D-R.I.) would attack the cost of credit by imposing a strong, permanent cap of 36% annual percentage rate (APR), including fees, on consumer credit – covering credit cards as well as installment, car-title, and payday loans.
The bill would extend the rate cap that now protects active-duty military members so that it covers everyone in America.
“This legislation would stop predatory lenders from fleecing families who are already overburdened by the high cost of essentials like food and housing,” said Nadine Chabrier, senior policy counsel at the Center for Responsible Lending. “The Predatory Lending Elimination Act would prevent lenders from charging extremely high prices through hidden junk fees or evasion of state laws. Congress should pass this bill to ensure every American has a baseline level of protection from exploitative credit.”
Opponents — the banking industry, in other words — argue that a strict rate cap would make loans to consumers with less than spotless credit histories less profitable. The measure “will mean financial institutions will be unable to profitably offer affordable small dollar loans to consumers,” the American Bankers Association said in a letter to Reed.
The Predatory Lending Elimination Act covers all types of lenders, including banks, and would eliminate predatory payday loans, auto-title loans, and similarly harmful, high-cost credit across the nation by:
Closing loopholes and preventing hidden junk fees.
Simplifying compliance by adopting a standard that lenders already understand and use: the rate cap for service members that was established by the Military Lending Act, a bipartisan law enacted in 2006.
Stopping lenders from using “rent-a-bank” schemes to charge triple-digit APRs.
Upholding the ability of states to adopt stronger protections as needed, such as lower rates for larger loans.
Establishing a simple limit that has broad, bipartisan support from the public. State ballot measures to institute strong caps have received backing from across the political spectrum. For example, a measure in Nebraska recently passed with support from 80% of voters.
The measure does not apply to residential mortgages, car purchase loans, or loans by federal credit unions. Federal credit unions are already subject to an 18% interest rate cap for most loans and a 28% cap for payday alternative loans.
Aggressive debt collection
The flip side of the predatory lending coin is aggressive debt collection. As the cost of basic necessities rises, families are pushed into more debt and lenders are stepping up collection efforts, including lawsuits that leave families nearly penniless.
Each new debt collection lawsuit brings another family closer to destitution – with threats of seizure of wages, family homes and vehicles, household goods and appliances, and zeroed out bank account balances.
If they could hold off the pleas of banks and other lenders, state lawmakers could protect consumers by protecting a portion of a family’s bank account from seizure by debt collectors, so that no one is made homeless because their bank account has been drained for an old credit card debt.
A new National Consumer Law Center (NCLC) report, Safe Deposits: How to Protect Family Bank Accounts from Debt Collectors, looks at state exemption laws designed to protect families’ bank accounts from seizure and finds that protections vary greatly from state to state, with some protecting as little as $300 of a family’s hard-earned money, and others providing no protections at all.
“Seizure of a family’s bank account balance can be devastating for families that are confronted with the harsh reality that the money they’ve set aside for rent, food, utilities, and other basic necessities is gone,” said Carolyn Carter, senior attorney at NCLC. “States should replace what is often a confusing array of complex laws with an automatic, self-executing protection against raiding a family’s bank account.”
Bank account garnishment
The report looks at bank account garnishment, describes how it works, and identifies the role that debt collection lawsuits and seizure of income and property play in perpetuating and widening the racial wealth divide.
Because current laws are complex and many people do not even know they are being sued until their bank accounts are emptied, the report calls for state protections to be self-executing, and applied automatically. The report recommends that state exemption laws automatically protect a simple, flat amount, and preventing banks from freezing or garnishing any amount under $3,000 in an account.
“If the affordability crisis has taught us anything, it’s that many families are one unexpected event away from a financial crisis that can push them into a downward spiral of debt,” said Michael Best, director of state advocacy at NCLC. “Protecting up to $3,000 in a family’s bank account will stop families from being driven into homelessness by an old debt and periodically adjusting the protected amount for inflation will ensure the adequate protection of resources needed for a family’s survival.”