I once lived in a 1950s bungalow in Florida that became infested with palmetto bugs, which is really the tourism department's quaint name for cockroaches. When you turned on the kitchen light, the cockroaches would scatter. Despite efforts to get rid of the cockroaches, they would always come back.
I think of that image whenever I come across a new subprime or predatory lending scheme. Predatory lenders come in different shapes and sizes, but essentially they are the financial system's version of human cockroaches. Predatory lenders especially like to infest working class and poor neighborhoods, adding to the growing gap in income inequality.
Predatory lenders take advantage of unsophisticated borrowers – often the elderly working poor and minorities – who are struggling to make ends meet. Even when regulators or law enforcement agencies get around to shining a light on the misdeeds of predatory lenders they often run and hide, only to turn up again under a new name or in a different form.
More than a decade ago predatory and subprime lenders were on the front lines in creating the housing bubble. Banks and other mortgage lenders developed a variety of high-cost subprime mortgages for people who in the past would have been rejected because of poor credit or insufficient income.
Wall Street would bundle the shoddy loans and sell them off to investors. The lenders profited from the exorbitant fees and interest rates. But just like in the eventual endgame of a Ponzi scheme, the predatory lending system eventually blew up, leading to the 2008 financial crisis.
The housing collapse forced many predatory lenders to close or file for bankruptcy. Others were ordered to pay huge fines to state and federal regulators. Lawmakers – after initially turning a blind eye to the lending abuses – scrambled to implement reforms to provide more oversight and prevent a repeat of the financial meltdown.
Despite the heightened awareness and the reforms, many predatory lenders – just like cockroaches – have resurfaced.
The Philadelphia Daily News reported on Nov. 25 how a Pennsylvania company named Prime Funding was able to skirt normal foreclosure proceedings in order to take ownership of dozens of homes from borrowers who got behind on payments. That's because Prime Funding had borrowers sign a document called a deed-in-lieu-of-foreclosure at the same time they signed for their mortgages.
The document enabled Prime to take ownership of properties after they increased in value and either re-sell them or rent them out. Many homeowners lost control of the home and any equity they had built up even they missed just one mortgage payment. (Disclosure: I worked at the Daily News and wrote about predatory lending abuses in 2001.)
The resurgence of sleazy lenders in Pennsylvania is taking place even though the U.S. Attorney's office in Philadelphia in 2007 cracked down on a group of banks that were bilking the elderly.
Other states have likewise played a regulatory version of whack-a-mole when it comes to trying to stop abusive lenders. Pro Publica detailed how the abusive lenders circumvent reform efforts. For example, the Ohio legislature banned high-cost loans in 2008. But five years later, hundreds of payday loan stores continue to operate in Ohio, charging annual rates of up to 700 percent.
Last year, Delaware passed what was billed a major payday lending reform bill. The measure capped a decade's worth of work by consumer groups to gain some protection for borrowers. In the end, the bill limited the number of payday loans borrowers can take out in a year to five.
One payday lender, Cash America, said the bill only affected its short-term loan product not its installment loan product. As such, Cash America could continue to offer a seven-month installment loan at an annual rate of 398 percent.
Payday lenders are among the most egregious anti-thrift institutions. The lenders use high interest rates and exorbitant fees to entrap many struggling borrowers into costly loans that strip away what little wealth they have and add to their debt burden. In many poor and working class neighborhoods, payday lenders and check cashing agencies have effectively replaced traditional bank branches. (See Christopher L. Peterson's study on usury law abuses here.)
Unfortunately, there is no shortage of borrowers willing to pay the high rates and fees. A recent survey by the Pew Charitable Trusts found that 37 percent of payday loan borrowers said they would pay any price for a loan.
The problem is not limited to the United States. The Financial Conduct Authority in London plans to cap interest rates charged by payday lenders, including one named QuickQuid. The move would follow similar caps put in place in Australia.
Back in the United States, the lending abuses have especially hit many members of the military. The New York Times reported last month that a law passed in 2006 – the Military Lending Act – has loopholes that leave hundreds of thousands of service members vulnerable to a variety of predatory lenders.
In one instance, Navy Petty Officer First Class Vernaye Kelly has $350 automatically deducted from her paycheck twice a month to cover loan payments with annual interest rates of nearly 40 percent.
Kelly, 30, took out a payday loan with double digit interest rates to repair her car in 2005. She took out subsequent loans to cover existing payments. Despite years of reform efforts, the cockroaches keep coming. Kelly's story is similar to those of many military families as well as others who are struggling to make ends meet. (See the IAV report on the growing debt culture here.)
As Kelly told the Times: "Somebody has to start caring."