Predatory Lending Significant Danger To Indian Country

Predatory lending is a significant problem in Indian Country; however, it predominantly takes forms other than mortgage lending, according to preliminary findings of a new study.

The predatory lending study is a nine-month project headed by First Nations Development Institute (FNDI) with funding by the Annie E. Casey Foundation. NAIHC is also a collaborator in the study, and predatory lending surveys were distributed at NAIHC's annual convention in May. The goal is to produce original research on the extent of the problem of predatory lending in Native American communities and to document local solutions currently practiced by housing authorities and tribal governments.

"We are trying to understand the extent of the problem and looking into payday loans, car title loans, "rapid refunds" and mortgage loans with high interest rates and hidden fees," said Sarah Dewees, Director of Research for FNDI.

The study is also based on case studies and interviews with the Housing Authority of the Confederated Tribes of the Umatilla Indian Reservation, Lac Courte Oreilles Federal Credit Union (owned by Lac Courte Oreilles Band of Lake Superior Chippewa Indians), RezCars (a used car company owned by the Winnebago Tribe's Ho-Chunk Community Development Corporation), Cherokee Nation's Commerce Department and the Citizen Potawatomi Community Development Corporation (owned by the Citizen Potawatomi Nation).

Study results are showing that predatory lending is more common than researchers had expected, Dewees said. Short-term loans and refund anticipation loans (or RALs, which is the term used for so-called rapid tax refunds) were a major culprit and were taken out for various reasons, from medical emergencies to everyday expenses, Dewees said.

Several examples of the devastating impact of predatory lending emerged from this and other studies:

• An elder on a fixed income had two Class B loans that had to be paid every two weeks, totaling more than her income.
• A middle aged man took out a payday loan with a high interest rate and hidden fees, the cost of which became a cyclical drain on his paychecks, eventually taking all of his regular paycheck earnings plus $200.
• A tribal citizen purchased a home with a loan from the housing authority but then took another loan from a predatory lender, with a high interest rate. The family fell behind on payments and lost their home.
• A tribal citizen who owned his home outright after 30 years of payments got a home improvement loan from an unscrupulous lender and eventually lost the family's home.

Major problems seen in the case studies are that loans are made to people who cannot afford to pay and that the predatory lenders are not as willing as other financial institutions to work with consumers who fall into trouble, Dewees said.

The survey and case study research is also about documenting promising practices and local responses to predatory lending. "There are a lot of really innovative groups that are combating predatory lending," Dewees said. Strategies include:

• Educating tribal citizens, through financial education and other education outlets. Many housing authorities require financial education before tribal citizens can buy a home. They are also helping people with credit repair and getting loans at reasonable interest rates.
• Providing alternate products to high interest and payday loans. Native Community Development Financial Institutions (CDFIs) and sometimes tribes themselves are providing low interest, short term consumer loans as an alternative.
• Working closely with tribal citizens to help them access affordable home loans from reputable institutions. Tribal housing authorities are especially active on this front.

The support from the Annie E. Casey Foundation has been key, Dewees said. It has been very supportive of research on predatory lending in Native American communities and sees how the work fits with one of the foundation's other major focus areas, Earned Income Tax Credit (EITC) outreach. "We are very happy that they have decided to support research on predatory lending and that will help find solutions," Dewees said.

About one third of survey respondents said that predatory lending is "a big problem" in their communities and 40% said it is 'somewhat of a problem." Only about 28% of respondents said that it was "not a big deal." So to classify it in a larger picture, 73% of knowledgeable persons said that predatory lending was an issue in their communities, said Miriam Jorgensen, Associate Director for Research of the Native Nations Institute at the University of Arizona and Research Director of the Harvard Project on American Indian Economic Development.

The survey included more than 140 respondents representing 70 tribes and all nine NAIHC regions. Although the survey sample is small, Jorgensen, who has been analyzing the data, said that the information is valuable because tribal housing professionals are uniquely knowledgeable in this area. "They know individuals and communities, they engage them in loan markets, and they are basing their perceptions on that knowledge."

According to FNDI-NAIHC survey data, the main predatory lending problems in Native communities right now are payday lending, car title loans, and RALs (so-called rapid refunds). The fact that the study is showing that the big issue is not mortgage lending is not surprising because mortgage lending on a broad basis is fairly new to Indian Country, "But that doesn"t mean there is no impact or that there could not be a serious impact in the future," Jorgensen said.

Thirty-six percent of respondents said that RALs are among the top problems. Other studies are showing similar results. Jorgensen is collaborating with the Kathryn M. Buder Center for American Indian Studies and the Center for Social Development at Washington University in St. Louis, where she has been a visiting scholar, and is incorporating a study of theirs into this report. They have been collecting data at Volunteer Income Tax Assistance (VITA) sites and have 2,300 Native American respondents.

Of the respondents, nearly 600 reported having paid someone to prepare their 2005 tax return, and over half of those filers accepted a RAL. On average, those accepting a RAL paid $189 for tax preparation services, as compared to $121 for those who did not. All of these fees - the predatory charges on RALs and the tax prep costs are a waste of money, Jorgensen said, when you consider that many people in Indian Country have access to free tax preparation services through VITA sites on or near their reservations. Many people are not using that service, and "when they pay for [tax preparation at other locations] they are pressured to take a loan. It can be exciting to get money now," Jorgensen said. "However, people don"t realize that they often can get their money back in 5-10 days, without getting a loan and paying interest on that loan."

In the FNDI-NAIHC survey, payday loans were a close second to refund loans, as 33% of respondents identified them as problematic. Anecdotally, this is also an area where tribes are being the most progressive on financial education, Jorgensen said. Echoing Dewees" comments, she noted that tribes are teaching asset building and setting up their own consumer lending services. "Tribal programs can work with [borrowers], give them education. That takes the borrowers out of the cycle they were plunged into by "the big bad guys" and gets them away from 150% interest rates," Jorgensen said.

Showing the importance of financial education, some survey responses showed that even tribes that provide per capita distributions to their citizens still report some predatory lending, including heavy use of pawnshops.

"Tribes are beginning to take action on all these fronts, doing preventative measures," Jorgensen said. However, survey results indicate that in most tribal communities, even more education is needed. "You can almost never do too much. Even if a tribal citizen is already financially capable, for example, it's possible to offer investing options," and further their knowledge.

Preliminary results from the report were delivered at the National Congress of American Indians" annual conference in Denver, Colorado in November. The full report will also be available on FNDI's website in December. Study principals are also hoping to identify legal strategies that might limit predatory lending. Most predatory lenders are off reservation, but lend to tribal citizens living on reservation, Dewees said.

Paul Lumley, NAIHC Executive Director, has set aside time at the NAIHC Legal Symposium December 4-6, 2007, to discuss a legal strategy to address predatory lending. "Predatory lending is a significant obstacle for Indian Country when it comes to new homeownership, but there are very real dangers here too with cycle of debt that can financially impair families," Lumley said. "Gathering the raw data at the 2007 NAIHC Annual Convention was a major effort and NAIHC's partnership with the First Nations Development Institute and Annie E. Casey Foundation is sure to lay the groundwork for improvements in Indian Country," Lumley added.

Coverage of Survey at NAIHC Annual Convention May 2007

By Kimberly Hayes

Contact: Sarah Dewees, FNDI, 540-371-5615, ext. 47, http://www.firstnations.org; Miriam Jorgensen, Native Nations Institute at the University of Arizona and Harvard Project on American Indian Economic Development, 520-349-7118, http://nni.arizona.edu and http://www.ksg.harvard.edu/ NAIHC, 202-789-1754, http://www.naihc.net/

• Legislative Update from NAIHC's Office of Governmental Affairs
• Section 184 Program and Title Status Report Delays
• Predatory Lending Significant Danger to Indian Country
• Coverage of survey at NAIHC Annual Convention May 2007
• Tribes Taking Advantage of LIHTC Opportunities
• Environmentally Friendly House for Elder Provides Prototype for Future Green Building
• Paul Lumley wraps up first year as Executive Director of NAIHC
• Indian Health Service Can Provide Much Needed Assistance For Improving Infrastructure in Indian Country
• 33rd Annual Convention and Trade Show Denver, Colorado May 21 - 23, 2007
• About NAIHC