How Racially Driven Predatory Lending Hurts Us All
Predatory lending practices don’t just bring down the families and individuals caught up in the cycle of debt they create. These loans ultimately hurt the economy. That’s the main takeaway of a report released Tuesday by the Center for Responsible Lending, a nonpartisan research group.
In the report, The State of Lending, researchers found that borrowers who are caught up in one form of abusive lending are more vulnerable to other predatory lending institutions. In other words, if you have a subprime mortgage, you’re likely to also have credit card debt, payday loans, among other forms of debt.
In recent years, the predatory loan industry has grown rapidly. In 1996, there were an estimated 2,000 payday loan centers across the U.S. By 2010, there were nearly 20,000 such centers, which issued more than $29 billion in cash-advance loans.
The effect of this growth has been particularly evident in the mortgage industry. In 2012, Wells Fargo Bank agreed to a settlement of more than $200 million after a Department of Justice lawsuit found the bank had discriminated against black and Latino borrowers and disproportionately steered them into subprime loans. Just one year earlier, Bank of America paid $335 million to settle nearly identical claims from the Department of Justice that the bank had targeted borrowers of color with subprime loans.
So, Why Should You Care? This web of consumer debt is deeply impacting black and Latino communities. Ultimately, all Americans will pay the costs: High levels of debt make it difficult for people to purchase cars and homes, invest in education, put away money for retirement, and, in some cases, get a job. In short, consumer debt threatens the entire economy.
Predatory loan centers are often concentrated in low-income, predominantly black and Latino neighborhoods. Borrowers of color are two to three times more likely to receive an “abusive loan” with problematic terms than their white counterparts, the report found. The cost of these debt cycles trickles out into the broader economy. The report found that payday lender and car title loans in particular often correspond with an individual’s reliance on government support or charitable assistance. Of course, unpaid student loan debt falls on taxpayers. Graduates deep in debt are also less likely to pursue less lucrative careers such as teaching, researchers found, in part because they require more spending on advanced degrees.
The last decade’s housing foreclosure crisis is another example of how the debt cycle fuels broader disparities in wealth and wreaks havoc on the communities where they are concentrated. According to the report, overall housing wealth dropped $7 trillion between 2005 and 2011. Foreclosed homes effectively lessen the value of the homes around them. Homeownership is directly correlated to the wealth gap between white and nonwhite Americans. Homeowners of all races have higher median wealth than renters, and owning a home over an extended period of time increases a person’s wealth. This means that abusive lending practices like subprime mortgages, which disproportionately impact people of color and contribute to foreclosure, intensify the racial wealth gap.
The Obama administration created the Consumer Finance Protection Bureau partly to regulate the predatory loan industry. The report also points to the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 as another example of a law that is effectively protecting consumers. The CCA limits certain credit card fees and requires credit card companies to more transparently advertise interest rates, saving credit card consumers an estimated $12.6 billion annually. Twenty-one states and the District of Columbia have passed laws to rein in predatory lenders and, in some cases, put a cap on the interest rates they’re allowed to charge. These laws offer road maps for states that haven’t yet instituted these kinds of reforms to protect consumers, and they hint at a way forward for broader federal reform.