Group adds up ‘cost of bad lending’

This post comes from Mark Huffman at partner site ConsumerAffairs.com.

The Center for Responsible Lending has taken a calculator to tally up the costs to the U.S. economy of what it calls "bad lending" -- everything from subprime mortgages to abusive bank policies to payday loans.

The group has added a section to its Web site where consumers can see these costs broken down sector by sector and state by state.

For example, in California, CRL counts 731,779 total foreclosure starts from the first quarter of 2008 through the third quarter of 2009. Foreclosure starts increased 692% from 2006 to 2009.

Statewide, the projected loss in wealth from home-value declines from 2009 through 2012 totals $627 billion, according to the group.

Overdraft fees

Bank overdraft fees are also a big driver of "bad loan" costs, according to CRL. Debit cards, it says, were once viewed more positively. They offered the safety and convenience of a credit card without the danger of going into debt.

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But in recent years, millions of Americans have lost money when they were surprised by an overdraft fee -- or several -- averaging $34 for debit card purchases they thought they had the funds to cover.

As recently as 2004, 80% of banks and credit unions routinely denied debit card transactions that would have overdrawn their customers' accounts, according to the group.

In a complete reversal, today the large majority of customers are automatically enrolled in overdraft programs where debit card and ATM overdrafts are routinely approved and a fee is assessed. That's changing, with new Federal Reserve rules that go into effect later this year. But the toll for consumers has been a steep one.

According to CRL, American consumers spend more on bank overdraft fees each year than they do on fresh vegetables. According to the group, bank overdraft fees have increased from $10.3 billion in 2004 to a projected $26.6 billion in 2009.

Payday loan trap

As credit card lending tightens up, even more consumers are turning to payday loans, which CRL categorizes as among the most predatory lending.

A payday loan is usually a small amount of cash with a hefty fee, percentage-wise. The customer provides a post-dated check and the lender cashes it two weeks later, after the customer has received a paycheck.

But the problem for the consumer just gets worse. They've used the borrowed money to take care of whatever emergency they had and have repaid the debt in full out of their next paycheck.

But by repaying the loan with one paycheck, they have used up a large chunk of the money to live on for the next two weeks. That means they often return to the payday lender for another loan, falling into a debt trap.

CRL has pushed for a 36% APR cap, which would effectively eliminate payday loans, since their APR is closer to 400%. Five states have already passed such laws, but CRL has pushed for a nationwide cap.

It's no accident that CRL has produced the online resource at a time when congressional support for a standalone Consumer Financial Protection Agency appears to have stalled. While the House passed an overhaul of financial regulatory reform last year that included the CFPA, consumer advocates in Washington fear the provision will be dropped from the Senate version, in response to vigorous financial industry lobbying efforts.

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Such an agency, CRL argues, would rein in bank fees, end annual car dealer interest rate kickbacks on auto loans, regulate income tax refund anticipation loans, monitor the activities of payday lenders, do a better job than the Federal Reserve in regulating mortgage lending, and reduce the overall cost to the U.S. economy of "bad lending."

Related reading at ConsumerAffairs.com:

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