[Congressional Record Volume 154, Number 57 (Thursday, April 10, 2008)]
[Extensions of Remarks]
[Pages E581-E583]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                           PREDATORY LENDING

                                 ______
                                 

                            HON. TOM FEENEY

                               of florida

                    in the house of representatives

                        Thursday, April 10, 2008

  Mr. FEENEY. Madam Speaker, I would like to call to the attention of 
my colleagues and other readers of the Record the article from Consumer 
Rights League, which is reprinted below.

  Predatory Charity: The Self-Interested Self-Help of the Center for 
                          Responsible Lending


                           Executive Summary

       The term ``predatory lending'' seems to have appeared out 
     of thin air in recent years. In reality, the prevalence of 
     the term--and the accompanying public panic--owes much to a 
     sophisticated public relations campaign carried out by the 
     increasingly high-profile Center for Responsible Lending 
     (CRL).
       As the most visible face of the half-billion dollar team of 
     ``Self-Help'' non-profit organizations, CRL attacks competing 
     loan products. Under the guise of advocating in the interests 
     of its low-income customers, Self-Help makes loans at highly 
     profitable rates and uncharitably takes those low-income 
     customers to court over trivial monetary sums. Worse, CRL's 
     advocacy has worked to the disadvantage of low-income 
     borrowers.
       This report utilizes documents in the public record to 
     demonstrate: CRL's advocacy agenda--built on pseudoscience 
     that relies on arbitrary and opaque definitions and 
     unreliable estimates and assumptions--has harmed consumers, 
     according to recent Federal Reserve research; CRL's troubling 
     alliances--a spokesman who pled guilty to felony larceny, an 
     employee who engaged in eavesdropping, and a multi-million-
     dollar grant from a wealthy Wall Street investor with a stake 
     in the outcome of CRL's lobbying activities; the Self-Help 
     network attacks other lenders for allegedly using practices 
     that it employs--taking in charitable grants and low-interest 
     government loans while charging its customers uncharitably 
     high rates and prosecuting low-income customers for amounts 
     as low as $96; the Self-Help network has combined its 
     advantageous loan rates and aggressive legal attacks to build 
     a powerful organization with net assets of a quarter-billion 
     dollars and approximately $12 million in annual profit from 
     its largest loan-making body; the Self-Help network seems to 
     encourage its customers to assume high amounts of debt, Its 
     delinquency loan rate is almost 7 times the rate at 
     comparable credit unions. Its customers carry loan balances 
     over 3 times the rate of those institutions.
       Many consumer advocates work with financial institutions to 
     meet community needs. Yet the public record shows CRL and its 
     financial web do more harm than good. This report examines 
     CRL's record and concludes that public officials, 
     policymakers, and the media should be skeptical about the 
     group's complaints, while non-profit donors and government 
     bodies need to re-examine the charitable loan rates they 
     provide to CRL's web of financial organizations.


                    An Introduction to Self-Interest

       What do you call an organization that has made more than 
     $190 million in profit in the last ten years by targeting 
     poor Americans with high interest rate loans? If you were the 
     Center for Responsible Lending, you would call that 
     organization a ``predatory lender.'' However, this is a 
     description that fits ``Self-Help,'' CRL's network of non-
     profits.
       CRL is the research and advocacy arm of a large and 
     financially powerful web of organizations under the umbrella 
     of the Center for Community Self-Help. This matrix includes 
     the Self-Help Ventures Fund (the largest loan-making body), 
     the Self-Help Development Corporation, the Self-Help Services 
     Corporation (which pays salaries and many expenses for 
     network staff), and the Self Help Credit Union. According to 
     tax returns, the Self-Help network (except its credit union) 
     increased its assets by nearly 36 percent--from $181 million 
     to 245 million--between 2002 and 2004. According to the 
     National Credit Union Administration, the Self-Help Credit 
     Union reported $292,143,058 in assets as of November 2007.
       Questions have arisen as to whether this largess has 
     benefited the working poor or if the group's leaders have 
     simply been helping themselves. Critics scoff at Self-Help's 
     2004 decision to spend a whopping $23 million to buy a high-
     rise building in downtown Washington, D.C. for its 
     operations. Perhaps more troubling, one report examining tax 
     returns for the Self-Help Credit Union assets found: ``The 
     financial reports of the Self-Help Credit Union reveal that 
     throughout the 1990s Self-Help made loans to its officials 
     and senior executives averaging $30,000 to $40,000, a 
     practice permitted by Self-Help's conflict-of-interest 
     policy. In June 2002, one official received a loan for about 
     $1.2 million, and tax forms show that in March 2004 another 
     official received a large loan, bringing the total borrowed 
     by only two unnamed Self-Help officials to more than $2.7 
     million. Without explanation, those loans disappeared from 
     the Credit Union's financial report in December 2004.''
       Self-Help's credit union provides ample conflicts of 
     interest with CRL's attacks on other lenders. In November 
     2007, researchers from the Federal Reserve examined the 
     effects of payday loan bans, including the North Carolina law 
     successfully pushed by CRL. The researchers concluded that 
     payday lending was actually preferable to the fees credit 
     unions--like those operated by Self-Help--charge its low-
     income consumers: ``Payday loans are widely condemned as a 
     ``predatory debt trap.'' We test that claim by researching 
     how households in Georgia and North Carolina have fared since 
     those states banned payday loans in May 2004 and December 
     2005. Compared with households in all other states, 
     households in Georgia have bounced more checks, complained 
     more to the Federal Trade Commission about lenders and debt 
     collectors, and filed for Chapter 7 bankruptcy protection at 
     a higher rate. North Carolina households have fared about the 
     same. This negative correlation--reduced payday credit 
     supply, increased credit problems--contradicts the debt trap 
     critique of payday lending, but is consistent with the 
     hypothesis that payday credit is preferable to substitutes 
     such as the bounced-check ``protection'' sold by credit 
     unions and banks or loans from pawnshops.''
       These findings raise serious doubt as to the social value 
     of CRL's advocacy and the quality of its research.
       Further questions have focused on the group's drive for 
     political influence. CRL has publicly signed a letter with 
     the radical group ACORN. It has received significant 
     financial support from George Soros's Open Society Instiute 
     and tens of millions from the left-leaning Ford Foundation.
       Indeed, it will be the very low-income consumers extolled 
     in CRL's rhetoric that are most hurt by the group's power. 
     Self-Help and the CRL are redefining hypocrisy and creating a 
     new term: ``predatory charity.''


        Redefining Predatory Lending: When you make assumptions

       From elaborate assumptions to dubious omissions, the 
     ``studies'' released by the Center for Responsible Lending 
     have all the indications of advocacy-driven research. CRL's 
     studies make frequent methodological assumptions that 
     artificially inflate their findings. It is clear that their 
     reports are written with a pre-determined conclusion in mind.


         Federal Reserve Research Sinks ``Financial Quicksand''

       CRL has raised its public profile by attacking the practice 
     of ``predatory lending.'' Its media presence is largely in 
     response to its 2006 report, ``Financial Quicksand.'' 
     Unfortunately, CRL has built its argument on a foundation of 
     sand that erodes economic opportunity for the very low-income 
     consumers it purports to protect.
       If anything, ``Financial Quicksand'' sinks from its own 
     assumptions. The report is best characterized as a series of 
     arbitrary definitions. It uses non-nationally representative 
     estimates, derived from a serious of unjustified assumptions, 
     to argue that payday lenders ``cost'' Americans $4.2 billion 
     dollars each year. Although the report claims to offer a 
     national perspective on the payday lending industry, it 
     samples data from only four states for its central findings.
       Consider some of the report's problems: ``Financial 
     Quicksand'' makes 18 separate assumptions, many of which 
     would be charitably described as questionable, and rely on 
     another 53 ``estimates'' to reach their conclusions.
       Crucially, the report hinges on the critical (and flawed) 
     assumption that anyone who takes out five or more loans in a 
     year is likely flipping their loans back-to-back-to-back. 
     However, 22 states prohibit ``flipping'' loans and many more 
     limit rollovers--a fact ignored by the report.
       The report also suggests that payday loans ``cost 
     Americans'' billions of dollars and argues that banning them 
     could ``save'' billions more. In economics, a ``cost'' 
     typically occurs when capital is eliminated from the economy. 
     For instance, unnecessary inefficiency in a manufacturing 
     process could be seen as a ``cost to Americans.'' However, 
     financial services, including those offered by payday loans 
     operators, do just the opposite. They generate capital for 
     the economy and for each individual loan-taker.
       Claiming that payday lending bans ``save'' money is equally 
     dubious. Not only does the industry itself generate capital 
     for a state's economy and tax revenue for the government, but 
     payday loans, like any other loan, allow individuals to 
     generate more capital for themselves on the aggregate. By 
     banning payday lending, states don't ``save.'' Instead, they 
     experience a cost through lost tax revenue and lost capital 
     opportunities.
       Statistical research released from the Federal Reserve 
     suggests CRL's lobbying efforts against payday lending have 
     been misguided at best. In December 2007, the Associated 
     Press reported that, ``A ban on payday loans may be leading 
     to greater financial burdens for low-income residents of two 
     Southern states, according to a researcher at the Federal 
     Reserve Bank of New York.''
       Indeed, the Federal Reserve report specifically cited CRL's 
     ``research'' against payday lending and its estimate that a 
     ban would ``save'' Georgians $154 million. It concluded 
     that CRL's research was both flawed and costly to low-
     income consumers: ``Georgians and North Carolinians do not 
     seem better off since their states outlawed payday credit: 
     they have bounced more checks, complained

[[Page E582]]

     more about lenders and debt collectors, and have filed for 
     Chapter 7 (`no asset') bankruptcy at a higher rate.''
       ``The increase in bounced checks represents a potentially 
     huge transfer from depositors to banks and credit unions. 
     Banning payday loans did not save Georgian households $154 
     million per year, as the CRL projected, it cost them millions 
     per year in returned check fees.''


                         The Race Card and CRL

       In its report ``Race Matters,'' CRL strongly implies that 
     payday lending stores target minority neighborhoods in North 
     Carolina. The authors report that minority neighborhoods have 
     three times as many payday lending stores as non-minority 
     neighborhoods. But CRL fails to adequately account for other 
     important factors that predict the existence of payday 
     lending stores, such as a neighborhood's mean income. While 
     the authors recognize this significant shortcoming, they 
     still report the uncontrolled result.
       The researchers also conducted a multivariate analysis to 
     control for income, home ownership, and other factors. Their 
     analysis found that ``the highest 20 percent of African-
     American neighborhoods had 4.1 times as many storefronts per 
     capita compared to the lowest 20 percent.'' That said, an 
     examination of their methodology reveals an odd, and likely 
     highly significant statistical decision. Rather than look at 
     all census tracts and include racial and ethnic breakdown in 
     their regression, CRL's researchers created ``dummy 
     variables'' for neighborhoods based on the percentage of 
     minorities that lived in them. They then compared the 
     neighborhoods with the highest concentration of minorities to 
     those with the lowest.
       This methodology is problematic because a neighborhood's 
     racial or ethnic breakdown is not a black and white issue. By 
     artificially pitting the few neighborhoods with the highest 
     minority concentrations against those with the lowest, they 
     were able to generate a dubious rhetorical point.
       Indeed, these major flaws led Wesleyan University economics 
     professor Thomas Lehman to say CRL's report ``contains severe 
     weakness and presents conclusions that are overstated at 
     best, and misleading at worst.'' He added, ``It must also be 
     recognized that the overall tone of the study suggests a lack 
     of objectivity perhaps motivated by an ideological bias 
     against the payday lending industry, which may explain why 
     (the authors) appear to overstate their case given the 
     weakness of their research.''


                         Failure to Lose Ground

       In ``Losing Ground,'' CRL's report on subprime mortgage 
     foreclosures, the organization again produced a report 
     warning of catastrophic consequences based on an arbitrary 
     definition.
       In the report, CRL researchers claim that 25 percent of 
     subprime mortgages ``fail'' within five years. This is a 
     critical distinction because the entirety of the report is 
     based on the number of failed mortgages--not the number of 
     foreclosed mortgages.
       While subprime mortgages have faced significant problems, 
     they have fallen predictably short of CRL's dire predictions. 
     That is understandable given how CRL defines a ``failed'' 
     loan.
       In fact, their own report admits that only 11 percent of 
     subprime mortgages will be foreclosed within five years. The 
     remaining 14 percent are loans prepaid during distress, such 
     as refinancing or selling a property. But the latter category 
     suggests a wide variety of equally beneficial or negative 
     outcomes. For instance, under CRL's definition, a loan 
     refinanced for a lower interest rate would qualify as a 
     failure. But this in no way indicates a ``failed'' attempt 
     at home ownership.
       By lumping loan refinancing and home sales during 
     distressed periods into its ``failed'' mortgages category, 
     CRL more than doubles the supposed costs of the subprime 
     mortgage industry.


                       Defining Predatory Charity

       The Center for Responsible Lending primarily attracts media 
     attention through its attacks on financial institutions that 
     serve low-income and high-risk consumers. CRL frequently 
     complains about interest rates and loan terms offered by 
     traditional and community financial service providers. The 
     group lobbies for laws that ban certain loan types and allow 
     borrowers to change the terms of active loans. The surprising 
     reality, though, is that CRL's family of financial 
     institutions appear more interested in helping themselves 
     than assisting the poor.


                        Buying Low, Selling High

       As ostensible charities, Self-Help organizations receive 
     support in the form of grants from non-profit foundations and 
     subsidized government loans at preferential interest rates.
       Self-Help pays typically between zero and four percent 
     interest on the loans it obtains, many of which come from 
     government-supported entities. The Ventures Fund took in more 
     than $2.5 million in loans from the Small Business 
     Administration's Microloan Program, with rates ranging from 
     2.5 percent to 4.5 percent. It also accepted more than $3.9 
     million from the U.S. Department of Agriculture's 
     Intermediary Relending Program, which carries a one percent 
     interest rate. On top of that, the Center for Community Self-
     Help has carried a zero percent loan from the state of North 
     Carolina for years.
       But Self-Help charges interest far above the charitable 
     rates at which it borrows.
       In 1998, the last year it reported interest rates on its 
     publicly disclosed federal tax form, the Self Help Venture 
     Fund reported that their average interest rate was more than 
     10 percent. For reference, that is approximately three 
     percentage points higher than the average home mortgage rate 
     in 1998, according to HSH Associates Financial Publishers. 
     That adds up to a nearly 40 percent premium over the average 
     rate. The Ventures Fund made other loans at interest rates as 
     high as 13 percent.
       Since 1997, the Venture Fund has made more than $190 
     million dollars in profit. It has made as much as $36 
     million--and no less than $13 million--annually since then. 
     During the same period, the fund turned over $468 million in 
     revenue. If the Venture Fund were officially a for-profit 
     entity, its profit margin would be a staggering 40 percent--
     far higher than the margins of the lenders Self-Help and CRL 
     attack.


   Hauling Customers into Court (and Kicking Them Out on the Street)

       Lien proceedings and foreclosures are not just the target 
     of CRL's rhetoric--they are the standard operating procedure 
     for CRL's ``Self-Help'' organizations. Despite their 
     denunciations of other lenders, the Self-Help network takes 
     action against its low-income consumers through lawsuits and 
     foreclosure proceedings.
       Like the lenders it attacks, Self-Help seeks judicial 
     recourse when borrowers do not repay them. But in 2000, Self-
     Help founder Martin Eakes told PBS that they were better able 
     to gauge how low-income individuals would repay loans: ``[W]e 
     went for ten years, we have had our first loss of a home loan 
     of $10,000 in a total of $120 million of lending directly and 
     indirectly we have made, to mostly minority, single moms. We 
     had our first $10,000 this past year. So, whatever people 
     believe, the truth is, if someone has a chance to get a 
     toehold and own a home, they will be far better borrowers 
     than most of the rest of us.''
       That may not be the whole story. The data from the National 
     Credit Union Association, which oversees Self-Help Credit 
     Union, paints a startling picture. As of September 2007, 
     Self-Help's ratio of delinquent loans to loans issued was 598 
     percent higher than its peer credit unions. Ignoring CRL's 
     critique that payday lenders and subprime mortgage lenders 
     are too aggressive with amounts they offer customers, Self-
     Help Credit Union's customers carry an average loan balance 
     of $40,733--more than 200 percent higher than at comparable 
     institutions.
       When loans terms are not met, Self-Help gets aggressive. 
     Records show that Self-Help organizations have taken 
     foreclosure or eviction steps against its low-income 
     customers for as little as $62,332 in 2005 and $50,768 
     against another in 2002. And despite CRL's public advocacy on 
     behalf of small borrowers, Self-Help's record includes 
     lawsuits against countless small-dollar borrowers, including 
     suits for as little as $96.
       The Self-Help organizations based in North Carolina have 
     taken legal action against local Southern favorites, 
     including: a fried chicken store in 2001; a BBQ joint in 
     1997; a NASCAR collectibles company in 2002.
       Perhaps more troubling, Self-Help has hauled local 
     charitable organizations into court, including: the Appleton 
     Academy in 2000; the Creative Learning Center in 2003; the 
     Calvary Christian Church in 1993; Joyful Noise Daycare in 
     1998; an eviction of Oz Land Child Care Center in 2003; the 
     Non Profit Consulting & Training Center in 2004 for only 
     $956.


                   Strange (and Criminal) Bedfellows

       In September 2007, the Center for Responsible Lending 
     arranged news events that sought to damage payday loan 
     companies by providing former industry employees who alleged 
     negative business practices by their former employers. The 
     gambit paid off: several news stories ran with headlines 
     potentially damaging to the industry. Yet the credibility of 
     CRL's witness Michael Donovan, a former employee of leading 
     payday loan company Check `N Go remains clouded in doubt.
       A lawsuit filed by Check `N Go's parent company alleges 
     Donovan and CRL conspired to defraud the firm and that 
     Donovan lied about his criminal record. The suit alleges: 
     Donovan provided a fake Social Security number to gain 
     employment at Check `N Go; when asked about the problematic 
     Social Security number, Donovan provided a forged Social 
     Security Administration document to gain employment; Donovan 
     illegally provided confidential company information to 
     CRL; Donovan allowed CRL to eavesdrop on a trade 
     association conference call.
       According to the suit, Donovan's criminal record includes 
     an April 2000 guilty plea in Arlington, Virginia to four 
     counts of forgery, three counts of larceny, and one count of 
     attempted larceny.
       Donovan was sentenced to four years in jail but served only 
     eight months, according to the suit. Perhaps most shocking 
     was that at the time he applied for the job at Check 'N Go, 
     Donovan was again reportedly facing felony charges of grand 
     larceny.


                  Did CRL Sell Out to Private Equity?

       Monetary acrobatics by high-flying, high-finance figures 
     can be complex and confusing. Yet CRL mortgaged its name for 
     a $15 million infusion from a billionaire hedge fund manager 
     who profited from the declining value of mortgage-backed 
     securities, caused by borrowers who have difficulty paying 
     their mortgages.

[[Page E583]]

       CRL has dubbed much of subprime lending--loans to high-risk 
     candidates with low credit ratings--as ``predatory'' despite 
     little evidence to support such claims. Yet the group is 
     lobbying to change existing laws to allow high-risk borrowers 
     to adjust the terms of their mortgages. This would benefit 
     those making a financial gamble on future trouble in subprime 
     mortgages.
       On October 12, 2007 Business Week published an unusual 
     report on the apparent philanthropy of a billionaire hedge 
     fund investor who gave a multi-million-dollar grant to CRL. 
     But there was more to the story: ``A $20 billion hedge fund 
     may have hit on a unique investment strategy for playing the 
     subprime mortgage bust: fund a consumer-protection group. 
     Paulson & Co., which has seen its assets under management 
     soar this year through fortuitous bets in the subprime 
     market, has given $15 million to the Center for Responsible 
     Lending, a Washington nonprofit that has been lobbying on 
     Capitol Hill for passage of bankruptcy legislation.''
       ``Paulson, run by former Bear Stearns (BSC) investment 
     banker John Paulson, stands to rake in a windfall if the 
     measure passes. The key bill, introduced last month, would 
     allow federal judges to restructure mortgage terms and lower 
     payments on the primary homes of borrowers in bankruptcy, a 
     significant legal change. The process, known as a ``cram-
     down'' in industry jargon, is opposed by investment banks 
     that trade in mortgage-backed securities.''
       According to CRL and Paulson, the donation was not to be 
     used for lobbying, but the Washington, D.C.-based Politico 
     noted that CRL is ``a key supporter of pending legislation 
     that would allow homeowners to reduce mortgage payments on 
     their homes by declaring Chapter 13 bankruptcy.'' Enactment 
     of CRL-supported bankruptcy legislation would further erode 
     the value of mortgage-backed securities, which would increase 
     the value of Paulson's holdings.
       The subprime gamble is a big business opportunity for 
     Paulson, whose firm, according to Bloomberg financial news: 
     ``. . . made big bets predicting the edifice would soon come 
     crashing down. The wager paid off in the first nine months of 
     2007, when Paulson's Credit Opportunities funds rose an 
     average of 340 percent.''
       ``That gain earned Paulson an estimated $1.14 billion in 
     performance fees for the nine months ended on Sept. 28.''
       A spokesman for traditional financial institutions added, 
     ``When they start pushing for legislation to make more money, 
     they're lining their own pockets with people's homes, 
     that's a little sticky.''
       There is little evidence to suggest that Paulson's donation 
     represents merely a one-time payment to CRL. It seems likely 
     that the original $15 million donation was part of a multi-
     year campaign to profit off of American consumers' mortgage 
     woes.
       The press release announcing the first donation disclosed 
     that Paulson ``said he hopes that his firm's donation is just 
     the beginning . . .'' Indeed, as of July 2007, Paulson 
     specifically stated that his investment horizon was two to 
     three years, saying of his subprime bet: ``The performance of 
     these pools will not be decided over one month or two months. 
     They will be decided over the next three years. Our 
     investment (commitment is not based on) looking at what these 
     bonds trade at today or tomorrow, but what the losses in 
     these pools will be two or three years from now.''


                               Conclusion

       America's working poor and low-income individuals often 
     benefit from well-intentioned advocates. But when those who 
     claim to speak on behalf of the vulnerable use their position 
     to benefit themselves, it is an act of betrayal. The public 
     record demonstrates clearly that the Center for Responsible 
     Lending and its Self-Help network fit this profile.
       CRL's research is agenda-driven. Its advocacy has cost 
     consumers more than it has ``saved'' them, according to 
     Federal Reserve research. It relies on race-based claims to 
     generate media interest. And it takes money from self-
     interested Wall Street billionaires who profit from the 
     mortgage crisis so astutely hyped by CRL.
       Self-Help takes in money at low rates and charges generous 
     mark-ups to its low-income consumers. Federal records show 
     Self-Help's credit union allows its borrowers a much higher 
     average loan rate compared to similar organizations, a 
     critique at odds with CRL's attacks on lenders who extend too 
     much money to those who may have trouble repaying their loan. 
     Finally, Self-Help loses its charitable image when it takes 
     legal action against its low-income customers.
       There is a name for such groups: predatory charity.

                          ____________________