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.

By Terri Elders

“Another day older and deeper in debt,” for many signifies a reality of life, not just the lyrics of an old Tennessee Ernie song. As Christmas nears, I just heard on the NBC news that thirteen and a half million people in the United States are still paying off bills from last Christmas. Worse, I learn, more of us shortly will consider borrowing money we’ll never really be able to pay back, to buy Christmas gifts we can’t really afford.

It’s not as if we Americans are intrinsically greedy. It’s just that temptation lurks in our mail boxes in the form of catalogs, on our television with its incessant commercials hawking the latest “in” toys, and, of course, in seductive store window displays in every mall and on every Main Street. It’s tough to say “no.”

Since nobody other than our mothers might be willing to front us an interest-free loan, where do we go if we decide we can’t bear to watch the New Year’s football games on anything other than a new plasma television? The Aspen Institute has identified payday loans, refund anticipation loans and rent-to-own as three predatory lending practices it calls its Nasty Nine.

Payday Loans

The $125 billion a year industry has more retail locations than McDonalds, Burger King, Wal-Mart, Target, Sears and J.C. Penney combined, counting pawnshops, tax refund lenders and rent-to-own stores. But no storefront is needed. Internet and telephone operations avoid state laws and limits, and are accessible in rural areas. Just Google “payday loans” and 1,490,000 results show up. Most sites promise up to $1500 within hours, no credit check necessary.
Payday loans, usually secured by a post-dated check, might seem like a quick solution to a temporary cash shortage, but are a dangerous consumer rip-off. Who uses these services? Payday lenders target younger consumers with a limited understanding of finances, people who are deeply in debt and struggling to meet their basic financial obligations, and those who have a history of using high-risk lenders.

Payday loans are deceptive. Since you're forced to turn over a postdated check, you may be harassed, threatened, or subjected to collection practices. The payday lender may deposit the check before the date you agreed on, causing your check to bounce and forcing you to pay more fees. Because people who use payday lenders are usually in desperate financial situations already, they may have trouble repaying the original loan and they continue to extend it until they've paid more in fees than the amount of their original loan.
The US Federal Trade Commission recommends avoiding payday lenders. Here’s why payday loans make Aspen Institute’s Nasty Nine:

• Typical cost = 650% to 780% APR.
• $500 for two weeks typically costs $$625 to repay.
• Average customer rolls loan over eight times, paying twice the original loan in interest.
• $500 rolled over for one year costs up to $3,900.

Possible Solutions:

• Make changes in your spending plans to avoid overspending.
• Find ways to increase your income.
• Contact a local credit union for a small loan.
• Ask for a pay advance from your employer.
• Consider a loan from family or friends and get the terms of the loan in writing.
• Use a credit card advance.
• Request additional time to pay the bill from your creditors instead of taking a payday loan.
• Seek credit counseling.

Plan ahead to prevent financial emergencies.

Refund Anticipation Loans

On the surface, refund anticipation loans (RALs) might seem like a great deal. Used mostly by low and moderate income consumers, these loans are extremely high-cost bank loans secured by the taxpayer’s expected refund, loans that last a week or two until the actual IRS refund repays the loan.

Even without the costly loan, most taxpayers could have their refund in two weeks or less. RALs are aggressively marketed by income-tax preparation companies. These firms advertise "Instant Refunds" or "Quick Cash" for their customers who need money in a hurry. They disguise the fact that they are selling advance loans on anticipated tax refunds.

People whose income is low enough to qualify for the Earned Income Tax Credit are guaranteed a refund if they file. So tax preparation firms, for a fee, file the taxes and pay out a refund immediately, as a loan secured by the expected IRS check.

Here is why RALs are in the Nasty Nine, according to Aspen Institute. The government finally has found a way to reward people who work hard for less money with a tax credit. And predatory lenders have figured out how to get that money out of workers’ pockets, plus more.

Here’s why they’re in the Nasty Nine:

• 235% APR to get refunds a short time sooner.
• Often coupled with exorbitant tax preparation fees for simple returns.
• Marketed as instant refunds, not loans that must be repaid if the return is rejected.
• Cost poor families $900 million in 20006 plus $90 million in “document processing fees.”
• Target poor rural communities, towns near military bases, Indian reservations, and minority communities.

Possible Solutions:

• Try filing your own taxes, using Internet resources such as About.com: Tax Planning:US
• Use free tax preparation services if you qualify.
• Open a checking or savings account and your refund will be deposited within 10 days, sometimes sooner.

Rent to Own

In this current economic downturn, one industry that’s booming is rent-to-own. Aaron's, the second-largest retailer in the $6.3 billion industry, has announced plans to open 200 stores in 2010, following an 18% increase in same-store sales last year.

Rent-to-own stores provide what looks like an attractive option. Consumers can lease electronics, appliances and other household items by the week or month. Payments can be applied toward a purchase. But critics say the industry has taken advantage of vulnerable customers for years by making rental payments so high that a product's ultimate purchase price is exorbitant. Interest rates and fees can equal 100% to 300%.

Last year, New York’s Sen. Chuck Schumer called rent-to-own companies "one of the most despicable industries around" and cited a typical transaction. Schumer's staff found a 37-inch television offered at Rent-A-Center for 104 weekly rental payments of $31.99 each - a total of $3,326.96. The same model could be purchased outright at Best Buy for $850.

Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, though, says rent-to-own should be avoided. “The math just does not add up,” he says. “People should…look and see if in fact they can get a better deal somewhere else.”

This past July Washington State’s Attorney General’s Consumer Protection Division filed claims against Rent-A-Center, asking King County Superior Court to declare its collection practices and rental contracts in violation of the state’s Consumer Protection Act and Lease-Purchase Agreements Act. According to a press release on the AG’s website, this rent-to-own company allegedly had been:

• Harassing consumers with repeated telephone calls at home and at work after being told not to and filling a consumer’s answering service to capacity with collection messages;
• Making repeated collection calls to third parties such as family members or friends of the consumers, and disclosing the existence of the purported debt to third parties, and continuing such calls after being told not to;
• Using profanity and other abusive, threatening or humiliating language, including calling consumers “deadbeat,” “liar,” “thief,” and “ghetto trash”;
• Revealing consumer’s personal information to third parties in the course of attempting to collect debts;
• Using false threats of criminal arrest or other legal action, including telling children who are home alone that their parents will face legal action;
• Pounding aggressively on the doors of consumers’ homes even when the consumer clearly asked them to leave, shouting at consumers from outside of their homes, walking around the house and peering in windows when consumers refused to answer the door;
• Claiming to have a court order to serve when they do not;
• Making payment demands to babysitters or other third parties when the consumer is not in the home; and
• Going to consumers’ place of employment to demand payments and remaining even when asked to leave.

Possible Solutions:

• Comparison shop and use the low cost financing available through appliance and furniture stores.
• Work to improve your credit history to qualify for standard financing.
• Frequent local secondhand stores and charity shops that sell gently used furniture and appliances.

Next week: Sub-Prime Mortgage Loans, Title Loans, and Credit Cards.