This document provides an overview of predatory lending practices and how to avoid them. It defines predatory lending as extending credit to consumers who will be unable to repay due to their current and expected income. Common predatory lending practices include high interest rates, excessive fees, aggressive sales tactics, and harsh collection practices. The document discusses specific predatory loan types like payday loans, car title loans, tax refund anticipation loans, and rent-to-own agreements. It provides alternatives to predatory loans and tips on identifying and avoiding predatory lending situations.

1. Predatory Lending Practices & How to
Avoid Them
https://learn.extension.org/events/2113
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family
Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587.

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5. Available resources
https://learn.extension.org/events/2113
Find slides and additional resources under ‘event materials’

6. Presenters
Marcus Beauregard, Colonel, USAF (Retired) is the Chief of
the DoD-State Liaison Office (DSLO) within the Office of the
Deputy Assistant Secretary of Defense for Military
Community and Family Policy. Together with a Senior
Liaison and 8 Regional Liaisons, he works with state
governments on a slate of key issues important to Service
members and their families. Additionally, he is one of two
individuals responsible for the Military Lending Act and
updating the DoD regulation required to implement the law.
Dr. Barbara O’Neill, financial resource management specialist
for Rutgers Cooperative Extension, has been a professor,
financial educator, and author for 35 years. She has written
over 1,500 consumer newspaper articles and over 125
articles for academic journals, conference proceedings, and
other professional publications. She is a certified financial
planner (CFP®), chartered retirement planning counselor
(CRPC®), accredited financial counselor (AFC), certified
housing counselor (CHC), and certified financial educator
(CFEd).

7. Predatory Lending Practices
and How to Avoid Them
https://learn.extension.org/events/2113
Barbara O’Neill, Ph.D., CFP®
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

8. Webinar Objectives
• Provide a definition of predatory lending
• Identify red flags of predatory lending
• Discuss types of high-cost consumer loans
• Describe subprime lending
• Provide resources for further information

9. Military Consumer Protection
Day is Annually in July

10. More About Military
Consumer Protection Day
Military Consumer Protection Day (MCPD) is a joint
initiative to empower active duty and retired service
members, military families, veterans, and civilians in
the military community. MCPD provides free
resources as the first line of defense against fraud
and to help people make better-informed decisions
when managing your money.
http://www.military.ncpw.gov/

11. Question #1
What predatory lending
practices concern you and your
clients the most?

12. What is Predatory Lending?
• High interest loans
• Outrageous fees
• High-pressure salespeople
• Unaffordable repayment terms
• Harassing collection tactics
• Deceptive advertisements and practices
https://www.debt.org/credit/predatory-lending/

13. Target Populations for
Predatory Loan Fraud
• Vulnerable consumers (e.g., the elderly)
• Young consumers (e.g., new service members)
• People needing immediate cash
• People with weak credit records
• People living beyond their means
• People with limited education and/or income

14. Formal Definition of
Predatory Lending
“Extending credit to a consumer when, based
on the consumer’s current and expected
income, he or she will be unable to make
scheduled payments to repay the obligation.”
Reference: U.S. Truth in Lending Act
http://banking-law.lawyers.com/consumer-banking/predatory-lending.html
https://www.law.cornell.edu/wex/dodd-frank_title_XIV
http://www.occ.gov/topics/consumer-protection/fair-lending/index-fair-
lending.html

15. Predatory Mortgages
• Frequent refinancing
• High debt service-to-income ratio
• High loan-to-value ratio
• “Reverse redlining”
• Loan “packing”
• Deceptive sales practices

16. Question #2
Have you had any clients who
have had predatory home
mortgages or heard any horror
stories about them?

17. Other Predatory Lending
Practices
• Paycheck loans
• Pawnshop loans
• Car title loans
• Rent to own plans
• Advanced fee loan scams
• “Credit repair” companies

18. Payday Loans Have
Lots of Names
• Payday loans
• Cash advance loans
• Check advance loans
• Post-dated check loans
• Quick cash loans
• Video: https://www.youtube.com/watch?v=0lnXz14Uoi4

19. How Payday Loans Work
• Borrow against next paycheck
• Write a post-dated check to lender
• Amount paid = loan + lender’s fee
• Fee = percentage of check amount
• Payday loans typically last two weeks
• Check is not cashed for up to 14 days
http://www.consumer.ftc.gov/articles/0097-payday-loans

20. Costs of Payday Loans
• Typical charge: $15 to $20 per $100 loan
• Write $115 check to borrow $100
• Loan good for up to 14 days
• $15 finance charge = 390% APR (2 weeks):
• At next payday, borrower has two choices:
– “Redeem” the check with $115 cash or have lender deposit it
– Extend the loan with another fee
http://www.paydayloaninfo.org/

21. Payday Loan Roll-Overs
• Three roll-overs: costs $60 to borrow $100
($15 x 4)
• Six roll-overs: finance charge = $105 ($15 x 7)
• Finance charge can become greater than the
amount borrowed!
http://www.paydayloaninfo.org/facts
http://www.paydayloaninfo.org/state-information

22. More About Payday Loan Costs
• Payday lenders often call their charges “fees”
• Avoid state usury laws
• Loan cost is just like interest
• Even small fees add up
• 20% biweekly = $520% year (20 x 26)

23. True Story
• Hospital cafeteria worker earning $16,000
• Needed $200 to pay bills
• Paid $38 fee to borrow $200
• Next payday: did not have the money
• A year later: paid $1,220 in fees
• Still owed the $200

24. Alternatives to Payday Loans
• Small consumer loans
• Payment plan with creditors
• Advances from employers
• Emergency assistance programs
• Credit union loans
• Cash advances on credit cards
http://www.responsiblelending.org/payday-lending/tools-resources/
alternatives-to-payday-loans.html

25. Car Title Loans
• Give lender your car title to get a loan
• If you can’t repay, car is repossessed
• Lender keeps amount that car sells for
• Example:
– Your car is worth $2,500
– You owe the lender $1,000
– Lender pockets a $1,500 profit
https://www.consumer.gov/articles/1013-car-title-loans

26. More About Car Title Loans
• Loan usually 25% to 35% of car’s value
– Example: borrow $700 on a $2,500 car
• Interest rates are high: 20% + (for 30 days)
• Lenders usually require clear title (no loans)
• Therefore, cars tend to be older, but decent
• Lender takes a key as well as title
http://www.responsiblelending.org/other-consumer-loans/car-title-loans/

27. Pros and Cons of
Car Title Loans
Pros
– No credit check
– Few personal questions
are asked
– You keep your car
– Short wait for the money
Cons
– High interest charges
– Easy for lender to
repossess car
– Could lose equity in car
(car value- amount owed)
if lender takes it
If someone wants to get a car title loan, advise them to try to pay it off
within 30 days with expected income OR seek alternative cash sources

28. Tax Refund Anticipation
Loans
• Expensive way to borrow money
• Can end up spending > 10% of refund to get money
a few days sooner with RALs
• RALs (loans) and RACs (high-fee checks)
• Better options: VITA or AARP Tax-Aide assistance, e-
file and request direct deposit
http://www.responsiblelending.org/other-consumer-loans/refund-anticipation-loans/

29. Check-Cashing Outlets
• Charge high fees to cash checks
• Government, payroll, or personal checks
• May charge as much as $25 to cash $500
Social Security check
• Can cost hundreds of dollars annually
• Many also sell high-cost money orders
http://www.dollarsandsense.org/archives/2015/0115barr-figart.html

30. More About Check Cashing
Outlets
• Charge from 1% to 20% of check amount
• Average cost: between 2% and 6%
• Personal checks: usually have highest fees
• Appeal to “unbanked” households
• One of fastest-growing financial services
• One study: $396 annual cost to cash checks
and get 6 money orders per month

31. Good Alternatives to
Check-Cashing Outlets
• State-mandated accounts for LMI persons (e.g.,
Consumer Checking accounts in NJ):
http://www.state.nj.us/dobi/division_consumers/pdf/checkinga.pdf
• Credit union at work or church
• Electronic Transfer Accounts (ETAs)
• Supermarkets for cashing personal checks
• Other?

32. Advanced-Fee Loan Scams
• Ads say “Loans by Phone- No Questions”
• Tell people to call a 900 (toll) number
• Call could cost $100 or more
• Key message….Don’t borrow if:
– you have to pay fees up front
– you don’t know the lender
– you do not get loan terms in writing
http://www.consumer.ftc.gov/articles/0078-advance-fee-loans

33. Basics of Pawnshop Loans
• Bring item to be pawned to the shop
• Receive pawn ticket that must state:
– Terms of the loan contract
– Customer’s name and address
– Description of pledged item with serial numbers
– Amount lent
– Maturity date
– Amount to be repaid to redeem the pledged item
http://www.nolo.com/legal-encyclopedia/disadvantages-pawnshop-loans.html

34. Typical Items Pawned
• Watches and jewelry
• Televisions
• Audio and video equipment
• Musical instruments
• Camera equipment
• Firearms
http://www.nationalpawnbrokers.org/2012/6-things-
everyone-should-know-before-going-to-a-pawn-shop/

35. Pawnshop Loan Defaults
• Collateral becomes property of pawnshop
– Usually after a grace period of 1-3 months
• Most states require the broker to notify the customer
• Surplus is supposed to be returned to customer
– Rarely happens in practice
• Default rates range from 14% to 22%
http://www.bankrate.com/finance/personal-finance/pawnshop-101-what-you-need-to-
know-1.aspx

36. High Interest Rates
• At first, the cost seems low
• When taken as an APR, it can be as high as
240%
• Many pawnbrokers also charge storage and
insurance fees
• Average loan of $75- $100
– Typically 25% to 60% of item’s resale value
http://www.nolo.com/legal-encyclopedia/disadvantages-
pawnshop-loans.html

37. Rent-to-Own Basics
• Self-renewing monthly or weekly lease
• Choice at the end of each rental period
– Continue with the lease
• Make the next payment
– Return the merchandise
• No future payments on item
• Time period usually 18 to 24 months
http://www.consumer.ftc.gov/articles/0524-rent-own-costly-convenience

38. Types of Merchandise
• Home Electronics
• Computer equipment
• Furniture
• Appliances
• Jewelry
http://www.bbb.org/blog/2013/11/the-pros-and-cons-of-rent-to-own-furniture/

39. Reasons Why People
Use Rent-to-Own Stores
• Low weekly or monthly payments
• No down payment
• No credit check
• Quick access to goods

40. Pitfalls of Rent-to-Own
Stores
• Extremely high cost way to buy things
– Typically 3 to 4 times cash purchase price
• Can get a used item
– While paying for a “new” item
• Possible repossession
• Little regulation to protect consumers

41. Rent-to-Own vs.
Credit Contracts
Rent-to-Own
– Leasing/renting item
– Paying for its use
– When finished using,
don’t have to pay any
more
– If all payments are
made, customer will
own the item
Credit Contracts
– Purchasing an item
– Monthly payments
– Spells out the annual
percentage rate (APR) and
finance charge
– States cash price, monthly
payments, finance charges
and number of payments
– Ownership when all
payments are made

42. Comparison of Color-TV
“Purchase” Options
Store Payment Amt # of
Payments
Total Cost
Who
Makes
Repairs
Rent-to-
Own
$13.00/week 78 $1,014 Read
Contract
Installment
Sale @
19.8% APR
$16.00/Month 18 $291.06* You Do
Cash Sale $250.00 1 $250.00* You Do
*Sales tax not included
Source: Consumers League of New Jersey

43. How Quickly Fees Add Up
Weekly Rental $13.00 x 78 weeks $1,014.00
Sales Tax $0.78 x 78 weeks $60.84
Optional Coverage $1.00 x 78 weeks $78.00
Delivery Fee $10.00 x 1 $10.00
2 Late Fees $3.00 x 2 $6.00
Picked up because behind on Payment $10.00 x 1 $10.00
Reinstatement Fee $5.00 x 1 $5.00
Redelivery $10.00 x 1 $10.00
Total $1,193.84
For initial value of $250.00, you have spent an additional $943.84
Source: Annetta Jones, Reality of Renting to Own, Purdue Cooperative
Extension Service

44. Cheaper Purchase Options
• Save the $14 a week to purchase TV
• Purchase the TV on a bankcard
– Make payments equal to $14/week
• Purchase the TV on a store credit card
– Make payments equal to $14/week
• Ask the question:
– “Do I really need this item?”

45. Question #3
Have you had any clients who
have had predatory non-
mortgage loans? Describe
what happened.

46. Subprime Lending
• Lending to consumers
– with “blemished” credit records (low credit scores)
– with high debt levels
– with no credit history
– who don’t qualify for conventional loans
• Borrowers pay high interest rates and fees
• About 30% of U.S. population is subprime
https://research.stlouisfed.org/publications/es/07/ES0713.pdf

47. Characteristics of
Subprime Loans
• Wide variety of lending practices, including
– interest rates 1% - 4% more than prime loans
– high-cost loans at triple-digit APRs
• Includes borrowers at all income levels
• Risk-based pricing (tiers)
• People with poor credit histories
• Some subprime lenders are owned by banks
http://www.consumer-action.org/downloads/english/Subprime_Manual.pdf

48. Subprime Lending
Includes All Types of Debt
• Home mortgages and refinancing
• Home equity loans
• Credit cards
• Car loans
Common Characteristics: Different prices (tiers) for
borrowers based on credit scores and marketing to low-rated
consumers to increase lender profits
http://www.wsj.com/articles/lenders-step-up-financing-to-
subprime-borrowers-1424296649

49. Avoid Lenders Who…..
• Tell you to falsify information
• Pressure you to borrow more than needed
• Offer bigger loans than you can afford
• Fail to disclose loan terms
• Tell you to sign blank forms
• Won’t give you copies of signed documents

50. Key Take-Aways
• People can’t borrow their way out of debt
• Most lenders are reputable and fair
• Predatory loan interest and fees are outrageous
• Fees can sometimes exceed the amount borrowed
• Vulnerable consumers are a target market
• Lower-cost borrowing alternatives are available
• Shop around for loan terms, interest rates
• If a loan sounds too good to be true, it probably is

51. Key Take-Away
Applications
• Explain the pitfalls of excessive debt (videos, etc.)
• Do math calculations to highlight high loan costs
• Show rollover costs can exceed loan amounts
• Present lower-cost alternatives to predatory loans
• Teach people the “Rule of 3” to compare loan terms
• Teach people to be skeptical of exceptional deals

52. The Military Lending Act

53. Objectives
• Describe MLA protections
• Define the types of credit covered
• Describe how the revised rule works
• Provide important points for consumers

54. Military Lending Act
• What and who are covered
• Limits, restrictions and prohibitions
• Disclosures
• DoD rulemaking
• Consequences
• Relation to other laws

55. What and Who are Covered
• What: Credit as defined by DoD, does not
include:
– Mortgages
– “Purchase money” loans, like car loans
• Who:
– Active duty Service members, to include reservists on
active duty 30 or more days
– Their family members included in DEERS

56. Limits/Restrictions/Prohibitions
• Limit: 36% APR, to include all fees (as defined
by DoD) and sale of credit products at time of
loan.
• Restrictions:
– Refinancing
– Use of checks, bank accounts and vehicle titles
– Use of allotments
– Prepayment penalties
• Prohibitions:
– Waive SCRA rights
– Mandatory arbitration or onerous legal notice

57. Disclosures
• Military APR
• Truth in Lending Act disclosures
• Must be provided in writing and orally

58. DoD Rulemaking
• To define: credit, creditor, fees
• Define with regulatory agencies:
– Consumer Financial Protection Bureau
– Department of Treasury
– Federal Deposit Insurance Corporation
– Federal Reserve Board
– Federal Trade Commission
– National Credit Union Administration
– Office of the Comptroller of the Currency
• Review every two years

59. Consequences If Violated
• Loan null and void
• Borrower has private right of action
• Includes provision for punitive damages
• Possibility for criminal consequences

60. Relation to Other Laws
• Takes precedence over state law unless state
law provides better protection
• State laws apply to active duty Service members
and families residing in the state, regardless of
legal residence status

61. DoD Rule
• Credit and creditors covered
• Exemptions to Military APR
• Exceptions to restrictions
• Disclosures
• Creditor responsibilities
• Effective and compliance dates

62. Coverage
• Credit: All credit defined by the Truth in Lending
Act (except for exclusions in the law)
– 2007 rule only included limited definitions of payday,
vehicle title and tax refund anticipation loans
– 2015 rule includes all payday, vehicle title and tax
refund anticipation loans, pawn loans, installment
loans, open-end lines of credit and credit cards
• Creditors: All creditors and their agents

63. Exemptions to MAPR
• For credit cards: fees that meet “bona fide” and
“reasonable” criteria
• For small dollar loans:
– Fee of no more than $20, once per year
– For loans made under a rules established by a federal
regulator and an interest cap established in federal
law

64. Exceptions to Restrictions
• Refinancing restriction limited to payday loans
• Bank accounts can be used to secure loans that
have a MAPR no greater than 36%
• Vehicle titles can be used by depositories to
secure loans
• Allotments can be used by Relief Societies to
secure loans

65. Disclosures
• MAPR can be described in contract disclosures
rather than disclosed as a calculated amount
• Restriction on mandatory arbitration for covered
borrowers can be included in contract
disclosures
• Oral disclosures can be accommodated by
providing a toll free number

66. Creditor Responsibilities
• Offer credit that complies with the rule; or
• Satisfy their need for compliance by identifying
the covered borrower
– Creditors is granted a safe harbor if they use the
DMDC database or one of the credit reporting
agencies
– Creditors can use their own system to verify whether
a client is a covered borrower
• Borrower is not required to self-identify or affirm
status for the creditor

67. Effective and Compliance Dates
• Date published: July 21, 2015
• Effective date: October 1, 2015
• Compliance date:
– For credit other than credit cards: October 3, 2016
– For credit cards: October 3, 2017

68. Key Points for Consumers
• The MLA doesn’t cover all predatory lending
• The creditor identifies the covered borrower
• The MLA is about restrictions, not disclosures
• The restrictions don’t limit good credit options
• People can’t borrow their way out of debt

69. For follow-up information and questions:
Ø Dr. Barbara O’Neill:oneill@aesop.rutgers.edu
or @moneytalk1 on Twitter
Ø Marcus Beauregard:
marcus.j.beauregard.civ@mail.mil

70. Evaluation and CE Credit
The Personal Finance Concentration Areas team
will offer 1.5 credit hour(s) from AFCPE for AFC-
credentialed participants and 1.5 general CEUs
for FinCert certified CPFCs.
To receive CE credit please complete the
evaluation and post-test found at:
https://vte.co1.qualtrics.com/jfe/form/
SV_2uALc8AGkJlYcXb
*Must pass post-test with an 80% or higher to
receive certificate.

71. Personal Finance Upcoming Event
Estate Planning Basics & Advanced
Directives
• Tuesday, September 15, 2015
• Time: 11 a.m. Eastern
• Location: https://learn.extension.org/events/2149
For more information on MFLN- Personal Finance go to:
http://blogs.extension.org/militaryfamilies/personal-finance/

72. Webinar today at 2 p.m.ET
RSVP:
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i=252031&k=006440097856

73. Find all upcoming and recorded webinars
covering:
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Personal Finance
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family
Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685, 2012-48755-20306, and 2014-48770-22587.