Horizons Community Blog (Colville, WA)

By Terri Elders

If you’ve been reading this series so far, you might guess that in the past few weeks I’ve immersed myself in researching theories about why the poor in rural America stay, uh… poor. I’ve even thought about that question raised in that old song: “There's nothing surer, the rich get rich and the poor get children. In the meantime, in between time, ain't we got fun?”

Well, I’ve got an answer now, and in a word, it’s “no.” It’s not fun now, nor has it ever been. Not even in Victorian England when entire families went to debtor’s prisons. Just read Charles Dickens’ Little Dorrit, where people who owed money were imprisoned and unable to work, until they repaid their debts. And even today analysts allude to the practices that keep the poor in debt in the United States as 21st century credit slavery.

Full disclosure: I’m neither an economist nor a financial consultant. Sure, I can file my own income taxes, but that’s about it. I’ve been a teacher, a social worker, a writer, a consultant. I’ve worked with economically disadvantaged people all my professional life, both in the United States and in dozens of developing countries with the Peace Corps. But until last month I had never even heard of car title loans, let alone refund anticipation loans. True confession…I’ve been clueless.

I’ve considered so many theories. Theoretically, I’ve been told, in the United States poverty is related to lacks: lack of education, lack of opportunity, lack of social justice, lack of ambition, lack of this, that and the other. Never though, had I suspected that predatory lending traps might make a significant contribution in keeping the poor ever deeper in debt.

Some say it’s the food chain…those above feed on those below. Others claim it’s simply how capitalism works. More point out that prey and preyers are distinguished by where eyes are positioned. We consumers have to be reminded to keep our eyes positioned straight ahead. We’re not prey. This is so important to remember: eyes open, look around, to the front and to the sides, to see what might be going on.

When I attended the Rural Families Economic Success conference in November, as part of the Colville Horizons RuFES group, I learned about the Nasty Nine. I learned about how so many legal, but vicious, practices do more than just prevent the poor from climbing upwards. In recent times, they’ve nudged the middle class down the slippery slope, as well.

Another confession: I’ve become increasingly aware of aggressive solicitation by lenders. They’re pretty pushy people. Though telemarketers no longer can phone you up at supper time, thanks to the Federal Communication’s “no call” rule, lenders still have the Internet, the US mail, flyers and advertisements, as media to deliver their similar pitches.

These are their messages:

• We can lower your monthly mortgage payments.


• We will save you hundreds each month by consolidating your credit card and other payments.


• You can use your equity to buy that new (car, boat, kitchen, dream vacation - take your pick).


• You can save your home from foreclosure; refinance your way out of bankruptcy.

Think twice before responding to these solicitations.

In earlier articles we looked at the first six of the Nasty Nines. This week let’s take a look at the final three of these mostly legal, but extraordinarily costly, services that consumers should avoid.

Sub-Prime Mortgage Loans

The first, and maybe the most nefarious of the lot, is sub-prime predatory lending, that, according to many reports, has likely has stripped more wealth out of low-income rural families than all of the other eight combined.

Though these loans, offered at higher interest rates due to additional credit risk, have a useful role by allowing low-income families to share in the American dream of home ownership, they can become predatory when they:

• Steer qualifying borrowers away from a conventional loan.


• Load up with excessive points, fees, or insurance.


• Assess high prepayment penalties, a huge problem in rural areas.


• Involve “flipping,” (frequent refinancing to extract fees).


• Include “yield spread premium” kickbacks to brokers.


• Steer smaller loans of rural and low-income families to sub-prime subsidiaries.

Estimates of the amounts that low-income families lose through practices such as these run into billions per year, and substantially increase the likelihood of default. Surprisingly, in 2006 the Wall Street Journal reported that over 60% of all borrowers receiving these mortgages had credit scores high enough to quality for prime conventional loans.

Possible Solutions:

The best way to avoid a lender’s scam is not to accept the first offer you obtain, and to request quotes from several lenders.

If possible, work with a reputable mortgage broker. Brokers have dealings with various trustworthy subprime lenders.

Visit with local banks and lenders to learn about other options.

Title Loans

Car title loans are one of the fastest growing and least regulated forms of high-cost lending, particularly in rural areas where most low-income families own automobiles because public transportation simply doesn’t exist. Such loans are short-term (30) day loans secured by a car title which is held by the lender.

In Washington State, such loans are illegal, but they are available online. On their websites, potential lenders ask you to punch in your zip code to learn where the nearest store is. If you punch in the Colville zip code, 99114, it provides the address of the nearest store, in Coeur d’Alene, a scant 80 miles away.

The lender promises loan anywhere between $300 to $10,000, and that credit ratings never would be checked. It boasts it has a 98% success rate, whatever that might mean.

According to Aspen Institute, typically these lenders:

• Typically charge 25% per month (300% APR).


• Can cost you up to ten times that of even a high-risk car purchase loan.


• Hold the keys and repossess immediately upon a missed payment.

Possible Solutions:

• Pay attention to the APR. Borrowers can end up taking loan after loan end an endless cycle of debt.


• Shop around. Go to local banks and credit unions to check out any alternatives.


• Swallow your pride and ask family and friends for help first.


• Keep a rainy day savings account.


• Avoid forced arbitration clauses, if a car title loan is the only option.

Credit Cards

Finally, there’s some good news regarding predatory lender practices. Several of the worst credit card company practices will be partially or totally banned by Federal Reserve or Congress, effective 1/1/2010 or 7/1/2010. These include universal default, two-cycle billing, payment order manipulation, retroactive penalties and fee harvesting cards.

Credit cards can be a convenience, but according to the American Bankers’ Association, the average family today carries $8,000 in credit card debt. Think of what interest that much money could draw if it were in a savings account.

Possible Solutions:

• Monitor how much you charge in relation to your credit limit. If you charge more than 30% to 50% of your limit, your credit score could go down.


• Browse the reports section of CardRatings.com to shop for every kind of credit card.


• Know your interest rate.


• Read the fine print, and compare charges and fees.


• Pay the balance in full.


• Limit the number of cards you use to two.


• If possible, set aside 5% to 10% of your income after needed expenses to be distributed among retirement accounts, short term savings and an emergency account

21st Century Credit Slavery

To recap, the Nasty Nine include:

• Check Cashing


• Buy Here/Pay Here Car Dealers


• Courtesy Overdraft Loans


• Payday Loans


• Refund Anticipation Loans


• Rent-to-Own


• Sub-Prime Mortgage Loans


• Title Loans


• Credit Cards

The result of these predatory practices is that more than one in four low-income families pay more than forty percent of their income to service debt. Moreover, new bankruptcy laws now make it impossible to escape some debt.

How to Find Help

According to the Northwest Area Foundation’s 2009 survey in Washington State, 45% of Washingtonians do not know where they could go in their community if they needed help with basic necessities. Nearly half are unfamiliar with government services in their communities, such as temporary housing assistance and food stamps.

In the next few months, the Colville Horizons Board and the Colville RuFES team will be working together to identify ways to involve the community in Earn It, Keep It and Grow It. Interested? Take a look at the video, Living With a Hole in Your Pocket, on the Horizons Community blog, http://www.colvillewa.org/.

Next Week: Asset building by using such tools as tax credits.