Ethical Consumer credit Lending Practices in the United States
Adopted by the Commission on Social Action
Borrowing money can make it possible for individuals and families to secure a home or a car and escape the poverty that entrenches so many. Ideally, we would want all people to have access to credit and loans, regardless of income, citizenship, or race. However, the reality of our economy is that not all borrowers can obtain loans from the prime market. Due to a lack of credit history, collateral, or bad credit history, many must look to the subprime market. Such borrowers will often be burdened with higher interest rates and more stringent conditions. Too frequently, unethical lenders take advantage of less credit worthy borrowers by subjecting them to excessive interest and excessively complicated loans that trap borrowers in a number of ways, often leading to bankruptcy and/or loss of life savings, homes, and cars.
The collapse of the subprime lending market in the summer of 2007 and the recent spateof mortgage foreclosures is a significant example of the importance of ethical lending practices. This resolution does not address the mortgage crisis, not because the CSA believes that the issue warrants no action, but because it deserves its own resolution. While there is much to address regarding this crisis, this resolution focuses on the underlying issue of predatory lending. It also addresses a related issue: the impact of otherwise legal lending practices that affect all borrowers, but have particularly serious impact on those who are most economically vulnerable.
In this resolution, the phrase subprime lending market denotes the regulated lending market for borrowers who do not qualify for prime loans and seek alternative lending options. Predatory lending refers to lending practices that abuse the financial vulnerability of borrowers in the subprime market. Loans that are considered "predatory" carry unreasonably high interest rates, impose onerous terms and hidden fees on the borrower, and/or carry harsh penalties for failing to make timely payments and are often sold to borrowers with misrepresentation and misinformation.
Lenders, of course, may have to increase interest rates when taking on riskier loans, and high interest rates do not necessarily equate to irresponsible lending. Interest rates vary with the kind of loan, the risks associated with the loan, and the state of the market. Nonetheless, excessively burdensome transaction fees and loan terms, ostensibly justified by the riskiness of these loans, can be abusive and unethical. Other abusive lending practices include loan flipping (requiring a borrower to refinance a loan and incur fees in order to generate income for the lender), lending without regard to the borrowers ability to repay the loan, abusive prepayment penalties, and outright fraud, including undisclosed kickbacks to brokers.
Predatory lending can occur in many kinds of loans, includingtaxrefund anticipation loans, payday loans (that have a typical APR of over 400%), overdraft protection,andauto title loans. While many of these practices are well known, others are not. Overdraft loans (which provide coverage to borrowers who have reached a negative account balance) may come with excessive fees per transaction and per day until a positive account balance has been reached. Auto title loansoften have inflated interest rates, a short repayment window, and are made for significantly less than the vehicles value.
Commercial arbitration agreements voluntarily entered into by two knowledgeable parties are an important form of alternative dispute resolution. But these agreements are not to be confused with the mandatory arbitration provisions that foreclose access to the courts often found in predatory lending agreements. The latter usually appear in the fine print in the documents that borrowers are required to sign. Often the borrower is unaware of their existence until a dispute arises. The terms of the agreement often provide for arbitrators to be chosen from a list favorable to the lender. The agreements usually provide restrictive rules to govern the arbitration proceedings. The arbitrator unlike a judge must be paid by the parties. Rules may call for splitting of costs or assessing all of them against the losing party. The rules may limit the right of the borrower to demand production of documents and may narrowly limit issues that can be raised. There is no appeal from the decision of the arbitrator.
Unfair lending practices affect the most vulnerable among us. Predatory lending victims are usually impoverished individuals, rural borrowers, people on fixed incomes, and women, minorities, seniors, and military service personnel. Student borrowers without adequate financial literacy are also vulnerable. A 2000 study by the U.S. Department of Housing and Urban Development found that predatory lending practices are three times as likely in low-income communities, and five times as likely in black communities as in white communities. Lending practices that abuse borrowers, rather than serve their needs, fuel a continuous spiral of economic injustice and poverty in our communities.
Loan counseling and education can help protect borrowers against predatory lenders and make them aware of the risks they face, but legal protections must also be strengthened.
Currently, federal law provides limited protections against predatory lending practices. For example, the Fair Credit Reporting Act regulates the activities of credit reporting businesses. The 2007 Defense Authorization bill included an amendment setting a 36% cap on interest rate loans available to those in the military a traditionally vulnerable population.
However, these provisions are inadequate to protect vulnerable individuals.There is no law requiring a plain language document that would provide borrowers with an outline of their rights in the lending market and in the judicial system. The principal plain language disclosure requirement comes from the federal Truth in Lending Act (TILA), which requires the lender to disclose the loans annual percentage rate before the close of the transaction. Overdraft loans, however, are not covered by the TILA.
States have also sought to address predatory lending practices. Among other efforts, strong laws capping interest rates, limiting loan fees, and reducing the number of loan renewals exist in Massachusetts, New Jersey, New Mexico, New York, North Carolina, Oregon and West Virginia.
Jewish teachings and tradition highlight the importance of ethical business practices. Maimonides taught that loans should be a vehicle to self-reliance and not lead to a cycle of debt. Leviticus 25:14 states that all business transactions should be done in good faith and with clear intentions: "If you sell something to your neighbor or buy something from your neighbors hand, you shall not wrong one another." Bava Metzia 50b states the rule that if an overcharge is more than one-sixth of a sale, it is null and void.
In this spirit, the Union for Reform Judaism has previously adopted resolutions regarding discrimination in matters of economic investment and set forth a goal of pursuing racial and gender equality, and economic justice in our synagogues and communities (Commitment to Racial Justice (1963) and Economic Justice for Women (1983)). In 1997, the Union adopted a resolution on Socially Responsible Investment and implemented the Chai Investment Program (CHIP), with the goal of both the endowment as well as congregations investing 1.8% of their endowments in community development vehicles (such as local credit unions and loan funds) that have as their mission to increase access to credit for those who would otherwise not have access to the financial resources necessary for economic development. This goal has been met with respect to the Unions endowment, and many congregations as well are participating in this initiative. Information about the CHIP program can be found at the RACs website.
THEREFORE, the Union for Reform Judaism resolves to:
1. Support a lending market that responsibly provides credit to consumers, including:
a. Providing borrowers with suitable lending products to meet their needs;
b. Considering borrowers ability to repay the loan, interest and other fees; and
c. Providing mechanisms to address abusive practices.
2. Advocate for and support institutions that provide expanded access to fair and ethical banking services for low-income populations.
3. Support enactment and enforcement of legislation that would:
a. Cap interest rates on all forms of consumer loans at a level that is reasonable for borrowers but appropriately recognizes the risk that lenders incur;
b. Mandate mechanisms designed to increase borrowers understanding of the loan and loan terms;, including requiring lenders to provide borrowers with plain language documents explaining the provisions of the loan and detailing their rights in the collection process;
c. Require lenders to provide a mechanism for borrowers to communicate directly with their current lender/servicer to resolve disputes, including actions by lenders to collect outstanding debt and remedies to help consumers in default; and
d. Ban routine inclusion of mandatory arbitration provisions in loan documents.
4. Call for a revision of the Truth in Lending Act so that its requirements apply to all consumer lending products including overdraft loans.
5. Encourage our congregations to educate their congregants and communities about the dangers of predatory lending, as well as the need for responsible use of credit.
6. Urge congregants to volunteer their time educating those in the community who are most susceptible to predatory lending.
 U.S.Dept. of Housing and Urban Development. Unequal Burden: Income and Racial Disparities in Subprime Lending in America. http://www.knowledgeplex.org/kp/report/report/relfiles/usdhud.pdf
Maimonides, Mishneh Torah, Gifts to the Poor 10:7.