Asset Preservation Challenges and Prescriptions

1. Asset PreservationChallenges and Prescriptions Asset Funders Network Meeting Friday December 9, 2005 Presentation by Marva E. Williams Woodstock Institute

2. Summary of High Cost Loan Trends • Lenders justify the high rates by citing the high risk of lending to people with little money and/or bad credit • Marketing: storefronts have high visibility relative to alternatives, aggressive marketing • Small loan trends are indicative of larger U.S. economic trends: decline in middle-wage jobs, rising costs of health care, immigration, people with limited credit histories • Banks no longer make small loans–usurped by credit cards • Finance: securitization of subprime mortgages, payday lender-bank partnerships, stock corporations • Credit scoring

3. Woodstock Institute Strategy

4. Quick Asset Preservation Facts • In 1980, the savings rate was 10%; in 1990, it was 8%; and in 2000, the savings rate was 0%. • In 2000, homeownership rate for non-Hispanic whites was 72%; African-Americans, 46%; Hispanics, 46%; Asians, 53%; and all minorities, 47%. • The average homeowner had 54% in equity is their home in 2000, down from 70% in 1982. • Household debt to asset ratios have increased from 13% in 1980 to 16% in 2000. • Personal bankruptcies per 100,000 people have increased from 120 in 1980 to 530 in 2002. • Financial institutions are increasingly making their money on feesfor financial services rather than the spread between their cost of funds and their loan rates. Woodstock Institute Social and Economic Indicators (woodstockinst.org)

5. Key Features of High Priced Mortgage Loans • High interest rates and fees • Prepayment penalties • Balloon payments • No documentation of ability to repay • Single premium life insurance • Aggressive collections Woodstock Institute (woodstockinst.org); ACORN Fair Housing (acorn.org)

6. Interest-Only Mortgages • 61% of new mortgages in California • Lure of low payments • Generally 5 year interest only payments • Homes may not appreciate as quickly • Interest rates increasing • Lack of equity • Principal payments are forced savings • Option ARMs: can pay as little as 1.5% of mortgage- negative amortization Greg McBride. Bankrate.com Interest-Only Loans. October 2005.

7. Key Features of High Priced Consumer Loans • High interest rates and fees • Balloon payments • No documentation of ability to repay • Cannot pay in installments

8. High Priced Consumer Loans • Payday Loans (PDLs): A high-interest loan made by a storefront lender that advances a consumer’s paycheck for a service fee • Car Title Loans: A short-term loan that uses a consumer’s car title as collateral (consumer must own the car outright) • Refund Anticipation Loans (RALs): A short-term loan borrowed against an anticipated tax refund from the IRS; the borrower pays fees to the lender, which serve as an effective interest rate • Bounced Check Loans (BCLs): a regular feature of checking accounts, bounce protection is marketed as a loan program but regulated as a service • Credit Cards: often have misleading terms and fees, apply universal default, only rate range is advertised, convenience checks have different rates. Secured cards especially expensive. Over 75% of Americans qualify

9. High Priced Consumer Loans Other Types of Consumer Loans • Used car loans • Furniture loans • Rent-to-own stores • Pawnshops

10. Who is Impacted? Chicago Region Consumer/Community Demographics • Over half of subprime loans are in communities that are over 50% minority • Payday lenders located in minority and low-income census tracts • Payday loan borrowers: three times more likely to be debt burdened, earn 40% of area median-income, young, female, African-American

11. Community Impacts Subprime lending = Foreclosures = Property values • For every 100 additional subprime loans on owner-occupied properties from 1996-2001, there were an additional 9 foreclosure starts per census tract in 2002. The contribution of subprime home purchase loans to neighborhood foreclosure is 28 times that of prime home purchase loans • Each conventional foreclosure within one-eighth of a mile of a property (in Chicago, a city block) results in a 1.2% decline in that property’s value There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values by Daniel Immergluck and Geoff Smith, Woodstock Institute. June 14, 2005

12. Financial Service Locations Fannie Mae Foundation. Analysis of Alternative Financial Service Providers, 2004.

13. Wealth Protection Strategies • Policy development • Financial literacy • Affordable PDL alternative loan • Post-purchase counseling: Chicago Neighborhood Housing Services • Rescue fund: National Community Reinvestment Coalition • Tax refund splitting

14. Policy Development Mortgage Loans • Data reporting • Document ability to pay • Interest rate and fee limits • No prepayment penalties • No flipping • No financing of single premium insurance • No balloon payments • No loans with negative amortization • Payment plan • Borrowers gets loan they qualify for Coalition for Responsible Lending (responsiblelending.org)

15. Policy Development Short-Term Consumer Loans • Limit rollovers • Document ability to pay • Interest rate and fee limits • Cooling off periods • Payment plan • Public data

16. Financial Literacy Curriculum • Basic financial management • Cost of money • Weigh options Issues • Puts responsibility on consumers • Consumer motivation • Long-term impact

17. Affordable Alternative Loans Credit Union Affordable Payday Loans • Lower cost • Lines of credit and installment loans • Key features • Underwriting-financial sustainability • Financial Literacy • Savings incentives AECF: Low-Cost Payday Loans: Opportunities and Obstacles (aecf.org); Woodstock Institute Reinvestment Alert 16: Affordable Alternatives to Payday Loans: Examples from Community Development (woodstockinst.org)

18. Post Purchase Counseling Chicago Home Ownership Preservation Initiatives • Established 3-Year Initiative in 2003 • Partnership of Chicago NHS, City of Chicago and Chicago Federal Reserve Bank knowledgeplex.org/kp2/cache/documents/90881.pdf

19. Chicago Home Ownership Preservation Initiative • Counseling and education: $25 incentive to attend homeowner’s workshops • Preventing foreclosures through 311 Homeownership Preservation Campaign • Intervention: loan modification, forbearance, NHS reinstatement loans

20. NCRC Consumer Rescue Fund Background • Launched in 2001 • NCRC and 30 community partners

21. NCRC Consumer Rescue Fund Impact • Helped 1,000 consumers with high risk predatory mortgages • Mediation with lender to renegotiate terms including loan forgiveness and forbearance • Affordable refinance in 17 states

22. Tax Refund Splitting Background • In 2001, low-income files received $78 billion in refund payments through EITC and other tax credits • Can not save entire refund • Should commit to save part of refund through splitting in two accounts

23. Tax Refund Splitting Refunds to Assets (R2A) Pilot Program • Community Action Project of Tulsa County in Spring 2004 • 516 filers split refunds into savings and spending components http://www.tax-coalition.org/Resource%20Library/Splitting_Tax_Refunds.pdf

24. Tax Refund Splitting R2A Findings • 20% filers split refunds • Saved 47% of refunds– of which ¾ had no previous savings • Saved an average of $479 • Four months later, more filers still had savings compared to other filers

25. Role of Foundations • Support education and counseling • Make advocacy and policy development a priority • Convene meetings of advocates and financial institutions • Development of best practices • Deposits in CDCUs & Community Development Banks • Take risks

26. Asset Funders Network Meeting Friday December 9, 2005 Wealth Preservation Resources

27. References • Anderson, Steven G., Min Zhan and Jeff Scott. 2004. Targeting Financial Management Training at Low-Income Audiences. Journal of Consumer Affairs 38, no. 1, Summer. • Anne E. Casey Foundation. Winter 2005. Double Jeopardy: Advocasey Explores the High Cost of Being Poor. Baltimore, MD: AECF. • Azmy, Baher. 2005. Squaring the Predatory Lending Circle. Florida Law Review 57, no. 2, April. • Barr, Michael S. 2004. Banking the Poor. Yale Journal on Regulation 21, no. 1, Winter. • Clancy, Margaret, Michal Grinstein-Weiss. 2001. Financial Education and Savings Outcomes in Individual Development Accounts. Center for Social Development George Warren Brown School of Social Work. • Demos and CRL. 2005. Plastic Safety Net: The Reality Behind Debt in America. Demos and Center for Responsible Lending. • Elmendorf, Fritz and Richard Caponetti. 2005. CBA's Financial Literacy Survey Shows Efforts Aimed at Explaining Credit Scores and Underwriting Process. CBA News Release, April 28. • Immergluck, Daniel and Geoff Smith. 2005. There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values. Chicago, IL: Woodstock Institute. • Jacob, Katy. 2002. Evaluating Your Financial Literacy Program: A Practical Guide. Chicago, IL: Woodstock Institute. • Lerman, Robert I. and Elizabeth Bell`. 2005. Can Financial literacy Enhance Asset Building? Urban Institute Opportunity and Ownership Project 6 (September). • Quercia, Roberto, and Michael Stegman and Walter David. 2004. Assessing the Impact of North Carolina Predatory Home Mortgage Law. Fannie Mae Foundation Housing Debate 15, no. 3. • Temkin, Kenneth and Noah Sawyer. 2004. Analysis of Alternative Financial Service Providers. Washington DC: Fannie Mae Foundation. • Westrich, Tim and Malcolm Bush. 2004. Banking on Bounced Checks. Chicago, IL: Woodstock Institute. • ———. 2005. Blindfolded Into Debt: A Comparison of Credit Card Costs and Conditions at Banks and Credit Unions. Chicago, IL: Woodstock Institute.