Once again I hope I am asking a question which has an actual answer rather than an informed opinion.
Why is it that so few American states have laws which protect their citizens from unfair lending practices? I know certain establishments rake in the dough like nobody’s business. In fact, I work for one. Yet it appears that only Georgia has regulations which have any teeth.
Sometimes my job feels dirty and this stuff runs through my head.
I do not think a factual answer exists for your question and it will all be informed opnion. The topic is complex.
Since you demand a factual answer though here is the best I can do:
2004 Pending Predatory Mortgage Lending Legislation
Latest State Legislative and Regulatory Mortgage News
Those two links should keep anyone busy for awhile sorting through the loads of legislation (or proposed or pending legislation) on this issue.
How come nobody every complains about “predatory borrowing” when they take out student loans at 3.5%?
Why aren’t store credit cards that run close to 21% usury?
I’m not sure exactly what type of predatory lending you’re referring to, but I do have some info on those payday loan places that will give you a small amount of money in exchange for a personal check, car deed, etc.
Basically, the owners of those places have tremendous political clout. I remember a story on 60 Minutes awhile ago about how they’ve obtained very favorable, protective legislation in many states. Five minutes of googling gives me this. Not as much info as the original story, but the basics. And it does mention Georgia as trying to do away with such places.
I worked in a call center for a company that was handling a class action for a major lending company. The company was giving out home equity loans to the old/poor with interest rates of over 20 percent. These loans had an early payment fee of around 5000 dollars depending on how much you borrowed. In addtition they had a minimum payment that was so low that if you consistently made the minimum payment you would never pay off the loan. Of the people I talked to on the phone probably 50-60 percent were in bankruptcy or had their home forclosed on. All of this was perfectly legal in the states that they were offering the loans.
While talking to my bosses that only questionable practice they performed was sometimes the amount of the loan would be more than the house was worth. So even if you realized they were screwing you over before they took possession of your house, you wouldn’t be able to refinance because you had unsecured debt.
Now I’m not gonna say that these practices weren’t predatory and possibly downright evil, however if any of these people had actually READ or UNDERSTOOD the contract for their loan before they signed it they’d be in a lot better shape. Is it really the states responsibility to protect people who are this dumb?
I’m not sure if this fits your definition of predatory lending, but Frontline did a show on the history of the credit card. Here’s a couple short blurbs from their story:
*If you’ve ever looked at the return address on your statement, you may notice your credit card issuer is located in a state such as South Dakota or Delaware. That’s because these are the states that have either weak or no “usury laws” meaning there is no cap on the interest rate that is charged. The federal government once had national usury laws that set a cap on the amount of interest that could be charged on a loan. But after the Great Depression, it repealed them and some states put no new usury laws in place. That’s why Citibank, the issuer of Mastercard, moved to South Dakota, which has no cap on interest rates. *
Here’s a map of where the biggest credit card companies are located.
These clusters were largely formed by a 1978 Supreme Court decision (Marquette National Bank v. First of Omaha Service Corp.) that determined national banks only have to obey the interest-rate caps of the state they are chartered in, not that of the state where a bank’s customer lives. This means that when a bank from a state without limits on interest, like Delaware, issues credit cards to people living in states like Minnesota, which caps credit card interest at 18 percent, the customer can be charged any rate of interest.
Some would say this is the only reason to have government in the first place, to protect the weak, dumb, or otherwise exploitable. I’m no fan of the “nanny state”, but one of the very few legitimate purposes of government is to regulate this kind of thing.
I realize this is GQ, but what about those who take advantage of high interest loans because they have no alternative? Why not let the marketplace decide? Why is 21% unreasonable when the borrower has shitty credit?
You’re right that we shouldn’t debate the ethics in GQ. Note that I said “regulate” not “ban”. It’s one thing to choose a high-interest loan because you understand the issues and have no choice. It’s another thing when your “financial advisor” lies to you or intentionally obfuscates the fact that you will never be able to repay the loan given the twisted terms. The former is a market-driven choice. The latter is fraud and should be regulated.
Usury (predatory high interest rates) was once practiced only by “loan sharks.” These were shady guys with collectors who would break fingers and kneecaps for non-payment. The sharks have been swept out by the credit card companies and payday loan companies. Now that usury is perfectly legal, the predators can drag non-payers into court just like honorable business people do. In the Frontline pieces, it was revealed that card holders who are a few days late on one payment, or even late on an unrelated debt, are smacked with a huge interest rate raise. It is now legal for credit card companies to screw you six ways to Sunday, and three more before Wednesday. It’s all spelled out in the legalese tiny print of your card contract, but nobody reads that.
Not that you could understand it if you did read it.
Georgia has no effective laws against evil lenders. None.
There are laws against the payday loaners, and such. Esp. the companies that locate near military bases. These laws are not enforced. Georgia has the worst ethics laws in the nation. So failing to enforce laws has no negative consequence at all. (Along with the upside of bribes/campaign donations.)
A few years ago a law was enacted against evil mortgage lending practices. The industry threatened to stop all lending in the state and the legislature caved and revoked it. $ talks.
You are on your own against these scumbags in Georgia.
This is a woosh, right?
Yeah, and probably not appropriate to General Questions. I guess my point is that “usury” and “predatory lending” are in the eyes of the beholder. Where is the cutoff for a “predatory” interest rate? Is it be the same for everybody? A 21% interest rate may look like highway robbery to you and me. But to a company extending credit (i.e. putting THEIR money on the line) to someone with a spotty or non-existent credity history, this may seem like a reasonable safeguard against the higher risk of default.
This statement is certainly true. However credit card companies do much more than this. One of the more eggregious things they do is to increase the interest rate on their card if an individual is late on different card or credit arrangement. This and other excessive fees and charges are allowed by their intentionally confusing cardmember agreements.