This week, the organization I work for -- the Center for Responsible Lending (CRL) -- will release the first in a series of reports on the prevalence and impact of predatory lending across consumer lending markets. The series is called The State of Lending in America and its Impact on U.S. Households. This first report takes an in-depth look at mortgages, auto loans, credit cards, and student loans--traditional financial products that can provide real benefits to households.
Readers will draw their own conclusions when State of Lending comes out on Dec. 12, but here's my take on it as someone who has worked on predatory lending issues for the past ten years and in consumer finance and the mortgage business for twelve years before that.
In reading State of Lending, I was heartened by the record of strong reforms that improve consumer protections in mortgage lending and credit cards. Remember when credit card issuers could raise your interest rate to 29 percent because you were late on a utility bill, or when subprime mortgages routinely came with 18 percent interest rates and thousands of dollars in fees?
But I also was discouraged to see that abuses in auto lending and student loans show many of the same patterns we saw previously in mortgages and credit cards. For example, car dealers earn more by steering consumers into loans at higher rates than they qualify for, and students are pushed towards private education loans even though they may be eligible for lower-cost, safer federal ones. This sounds like the now-outlawed "yield-spread premiums" that mortgage brokers got when they unfairly steered home buyers into more expensive mortgages. And as State of Lending shows, this isn't the only problem in these financial markets.
Clearly, there's more work to be done here -- and this doesn't even address the predatory practices CRL will cover in two subsequent reports, such as payday and car title loans, checking account overdrafts, and debt collection abuses.
If CRL's experience in the past decade is any guide, enacting reforms in these and other areas will take time and careful thought. Consumer expenditures account for over 70 percent of U.S. economic activity, so having fair, affordable financial products is critical for the entire economy. And we need a sound, robust consumer lending sector to ensure households have access to credit when they need it. The two aren't in opposition either.
Our experience has shown that reforms require discussion and compromise among consumer advocates, financial services firms, and regulators; and a persistent focus on what will make our nation -- not just one segment -- stronger. The first step here is a well-informed, vigorous debate. I think our State of Lending reports can help there. The first report will be up on CRL's website starting this Wednesday. Let me know what you think.
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