Everyone, regardless of their income, should have fair and reasonable consumer protections when they borrow money. However, across our state payday lenders, banks and debt collectors prey on low and moderate-income communities, people of color, seniors, and military personnel. High interest rates and unfair risky loan terms threaten the financial security of many people in Washington. Consumers need strong protections that safeguard their crucial assets and their ability to meet their basic needs.
Payday and “Installment” Lending
Payday Lenders target people who work for low to moderate wages with loans that carry a typical APR, or annual interest rate, of over 390%. These loans are designed with terms borrowers usually cannot meet, forcing them into high-cost, long-term debt. An average payday loan borrower repays $827 to borrow $339. At a time when working families need every penny to help meet their basic needs, Washington borrowers need access to small-dollar loans they can successfully repay. Loans that carry triple-digit interest rates are not those loans.
Recently, we have been fighting bills that would create a “new” high-cost installment loan products. The proposed products may have a different pay structure than payday loans, but that’s about where the difference ends. They often carry high interest rates and ridiculous fees, trapping people into a debt cycle, and allowing for borrowers to be in debt for a full year. Moreover, high cost installment loans seek to completely skirt the consumer protections we passed in 2009 (see below for more information on the success of that law).
Debt settlement companies, also called debt adjusters, reach out to debt-burdened consumers with bold offers to help eliminate their debt by negotiating on their behalf. The debt settlement model usually requires that Washington households stop paying their creditors. Consequently, consumers suffer reduced credit scores, the escalation of collection actions by creditors, wage garnishments, collection lawsuits, and even bankruptcy. Research finds that consumers would be much better off working directly with their creditors than if they hire a debt settlement firm to negotiate for them.
Debt and Debt Collection
Families fall into debt for a variety of reasons, including illness, a medical event, job loss, or other life-changing situation. Fringe financial services targeting people in debt has seen rapid growth and change over the last five to ten years. In our state there has been a rise in debt collectors exploiting struggling Washington families, often leaving them worse off than when they started. We need strong regulation of predatory debt collection practices that threaten to deprive Washingtonians of their hard earned income.
Mortgage Lending and Foreclosure Prevention
Homeownership is a family’s most valuable asset and largest source of household wealth. However, families across the state are losing their homes to foreclosure at alarming rates. Between 2009 and 2011, over 110,000 families in Washington lost their homes—and foreclosure rates continue to soar. Lax underwriting practices, dangerous loan products, and a disregard for affordability have set up vulnerable homeowners to fail. As a result, many families with the most to gain from homeownership will lose their homes.
Through Poverty Action’s predatory lending campaign the legislature passed more consumer protection bills from 2008 through 2011 than in the last two decades combined.
2008: Passed one of the most significant mortgage lending regulations, requiring mortgage brokers to act in the best interest of borrowers. This law protects future borrowers, restores trust in the industry, and gives consumers the assurance that someone is looking out for their best interest as they make the biggest purchase of their lives.
2008: Enacted recommendations from the governor’s homeownership security taskforce, which include prohibiting the abusive practice of “steering” mortgage borrowers into higher cost loans than what they qualify for, banning loans with negative amortization in which the principal balance increases every month, and limiting pre-payment penalties that trap borrowers in unaffordable loans.
2008: Protected homeowners from ‘foreclosure rescue’ scams by regulating profit-seeking companies that offer to help homeowners at risk of losing their homes. Under this law these companies must disclose all information in a contract, including the possibility of homeowners losing their homes.
2009: Passed Washington state’s first law to rein in payday lenders, offering a number of important protections for payday loan borrowers. These protections interrupt the ‘cycle of debt’ by introducing an eight-loan cap per year and immediate access to a strong repayment plan. Since the law took effect in 2010, it has saved Washington consumers over $140 million in fees. At a time when poverty is on the rise, this law allows people to save money to meet their basic needs, instead of paying high interest rates to payday lenders.
2009: Passed new rules to stop payday lenders from harassing customers. Lenders must limit the number of times they contact you to collect payment to no more than 3 times in a single week and they cannot threaten, intimidate, or embarrass you.
2011: Responded to Washington’s foreclosure crisis by passing the Foreclosure Fairness Act, which created a foreclosure mediation program. This process requires the banks to meet with homeowners in attempt to help families facing foreclosure avoid losing their home and most valuable asset.
Emerging Consumer Protection Priorities
Zombie Debt (also know as Time-Barred Debt)
Zombie debt is when companies sell their old, uncollected debts for pennies on the dollar to third-party debt collection agencies. Debt collection companies then try to collect on old debts. Old debt comes back to consumers like a zombie coming back from the dead. If you pay a partial payment, it restarts the clock on the statute of limitations. The burden of proof lands on consumers, many which do not have documentation to prove that they already paid the debt.
Often people living on low incomes fall into debt and have their wages garnished when they are struggling pay their bills, feed their kids, and keep the lights on. Garnishment occurs when an employee’s wages are withheld to pay off a third-party debt. In today’s hard economy, working families making low wages should have sufficient funds to live on after a wage garnishment. Garnishment has significant impacts on consumers. Not only is their credit report severely damaged, but the income they use to provide for their family is substantially decreased.