Press Release July 18, 1997	Contact: Rob Schneider or Rafael Ayuso (512) 477-4431 Consumers Union Southwest Regional Office

Report Shows Fringe Lenders Flood Low income Neighborhoods As Banks Continue Their Exit

Finance companies, pawn shops becoming today's low income 'neighborhood banks'

AUSTIN, TX -- A report released today by Consumers Union's Southwest Regional Office shows finance companies and pawn shops are continuing their march into low income and minority neighborhoods in Texas at a time when banking institutions -- often affiliated with these profitable lenders -- continue to turn their backs on them.

The result is a troublesome, two-tier lending system in which mainstream banking at a lower cost is increasingly unavailable in these communities while fringe lenders with exorbitant rates continue to prosper. The report -- Our Neighborhood Banks: High Cost Loans for Low Income Borrowers -- includes maps of Houston, Dallas, and Austin that show a majority of finance companies and pawn shops are located in or near predominantly minority neighborhoods and neighborhoods with less than the median household income.

Rob Schneider, senior staff attorney for the Southwest Regional Office of Consumers Union, said the report offers a "disturbing snapshot" of recent shifts in the financial services industry in Texas. "Many Texans now have little choice but to rely on very expensive lenders for routine consumer loans," he said.

Schneider added that high interest rates at both pawn shops and finance companies are just the tip of the iceberg. "In the case of finance companies, we found numerous examples of expensive add-ons and unecessary, often harmful refinancings. It appears many finance companies make lots of money by convincing people to make bad economic decisions."

The report also found that the marketplace has failed to curb high rates and lending excesses. As a group, consumers with limited financial resources or glitches in their credit history end up paying more in interest, fees, and other charges than their credit risk warrants.

According to the report, finance companies return "solid and sometimes spectacular profits." Often, these returns go to affiliate banking institutions. Ironically, these are the same institutions that shy away from the inner cities and higher risk loan markets.

"While the major banks appear to be skittish about serving the low income consumers, they are more than ready to soak up the profits that their finance companies make serving these same customers at substantially higher rates," said Schneider.

The report cites major banking corporations such as NationsBank, Norwest and Great Western which attribute a share of their profits to the banks' finance company subsidiaries.

Among the report's findings:

• Pawn shops are booming today, serving 10 percent of the U.S. adult population. Texas is second only to Florida in the number of pawnshops statewide, with approximately 1,260 establishments in 1996. Three of the four publicly traded national pawnshop chains -- EZ Pawn, Cash America Pawn, and First Cash Pawn -- are based in Texas.
  
• Finance companies also are spreading across the state. From 1992 to 1996, the number of regulated lenders in Texas (non-bank lenders, largely finance companies) increased 42 percent to 2,068 statewide. The volume of loans (total amount loaned in a calendar year) grew almost 50 percent between 1992 and 1995.
  
• Texas finance companies and pawn shops primarily locate in neighborhoods below median household income and in minority areas. For example:
  • Harris County -- most finance companies and pawn shops are located in or near neighborhoods where minorities comprise a majority of the population.
  • Travis County -- most finance companies and pawn shops are located in or near areas with below median household income.
  • Dallas County -- most pawnshops are located in or near minority neighborhoods, while finance companies cluster in or near low income areas and about half are in or near minority neighborhoods.
• Finance companies typically charge the highest interest rates allowed under the Texas Credit Code. This amounts to an interest equivalent to about 30 percent -- or 90 percent annual percentage rate (APR), depending on the size of the loan--much higher than the average 15.51 percent APR charged for a personal loan by commercial banks in Texas.
  
• Most pawn loans are made at the maximum allowable rate of 240 percent APR because most of them are very small loans. The average pawn loan for the EZ Pawn chain in 1996 was $67. For Cash America, with 145 Texas stores, the loan average was $70.
  
• Often, finance companies generate new loans by refinancing existing loans. For example, of the 910,000 Norwest Financial loans nationwide in 1996, 421,000 were refinanced loans with additional funds added.
  
• Finance companies often snare new borrowers with direct mail offers of instant cash. Promotional "lead cards" offer easy access to loans of $50 to $400. Cash vouchers are not uncommon.

"Many working families have been cut off from access to mainstream banks," Schneider said. "This means that they have little choice but to borrow under the terms dictated by 'fringe' lenders."

Finance companies profit handsomely from the difference between the increased rates they charge and the rates they actually need to offset somewhat higher delinquencies. At the same time, unfair marketing practices often hide the additional costs of loans (the extra cost of a refinancing, or the additional charges for credit life insurance).

The solution to the situation lies in stronger usury laws, increased oversight and market analysis by state regulators, and better access to mainstream banking services in low and middle income neighborhoods, according to the report. Among the recommendations:

• fair maximum interest rates that do not overstate the risk assumed by the lender;
• prohibit loan terms and conditions the borrower cannot reasonably be expected to fulfill;
• prohibit insurance products (like non-filing insurance) that are not fairly priced or in the interest of borrowers;.
• disclosure if a refinancing results in higher overall cost to the consumer;
• a fair refund of unearned interest using the actuarial method rather than the Rule of 78s;
• no new administrative fee added on to refinancings;
• adequate court remedies (consumers can pursue lenders under DTPA for abusive lending practices);
• subsequent purchasers of loans will be subject to all claims and defenses based on the conduct of the original lender;
• mechanisms to ensure pawned goods are returned in the same condition in which they were left;
• an independent Office of Access to Financial Services directed to study and recommend changes to improve the personal loan market; programs to improve equity in the financial services market. (For example, banks which own finance companies should have a program to effectively graduate finance company borrowers to lower cost bank loans.)