The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

ShoreBank, a staple of the Chicago Community, may be in jeopardy of seizure if it does not receive TARP funds from the Federal Reserve Bank. Unfortunately, as a recent article in the Chicago Tribune noted, current political jockeying around more bank bailouts has ShoreBank in the eye of the storm.

In 2008, the largest banks in the country received up to $25 billion in taxpayer funds. According to CNN, these banks included Wells Fargo, Citigroup and JP Morgan Chase. Even though many argued that Wells Fargo was particularly guilty of the worst subprime lending abuses against working families, support for its bailout was bipartisan. Congress was convinced that the government needed to step in or risk a major financial calamity. Yet a year and a half after the Wall Street bailout, Republicans are beginning to question the value of smaller, community banks such as ShoreBank, the very banks that are addressing the needs of working families and underwriting community investment projects.

Since its inception in 1973, ShoreBank has been a model bank committed to social justice.  ShoreBank’s mission has been to develop a triple bottom line of social responsibility, environmental responsibility and profitability, or “people, planet, profit.” ShoreBank’s website describes it as, “America's first community development bank.”

ShoreBank is not the only community bank to come under attack by Congress. The Shriver Center recently blogged about Park National Bank, another community bank with an outstanding community service record that was allowed to fail by the federal government. In particular, Park National was seized on the same day that U.S. Treasury Secretary Timothy Geithner presented Park National with $50 million in federal tax credits for its community development projects.

The failure of Park National, and now the potential failure of ShoreBank, raises grave concerns. It appears that large “too big to fail” banks which caused irreparable harm contributing to both the housing and economic crisis, should be bailed out, but the smaller, community banks which have been meeting the needs of low-income neighborhoods for decades should be allowed to fail. This is just another indication of how heavy lobbying by the financial industry has swayed Congress to put the needs of working families aside in exchange for campaign contributions and cash.

This time, however, things are not going unnoticed. The Coalition to Save Community Banking, a group of concerned neighbors and activists formed on Chicago’s Westside when rumors arose about the possible take-over of Park National by US Bank, another financial institution which received billions from TARP. Members of the coalition traveled from Chicago to D.C. to support then Park National CEO Mike Kelly. Today they are rallying to promote the interest of local banking including supporting bailouts for banks that help the community, as opposed to banks that suck money from working families giving little to nothing in return. We cannot afford to let ShoreBank fail the same way that Park National was allowed to fail. It’s time to tell the regulators that too important to fail should also include small, community focused banks. Chicagoans should be outraged by threats of another assault on our community and demand action from their congressperson to ensure ShoreBank and others like it remain protected in our state and in our country.

Susan Ritacca coauthored this article.

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A Republican filibuster has prevented the Senate from voting on its version of jobs legislation. The cloture motion (to end the filibuster) got 57 votes last week, but it needed 60 to pass. A clear minority of the Senate has, at least for now, successfully said “no” to recession relief for jobless people and budget relief for states. As a result:

Eighty-thousand unemployed workers in Illinois won’t receive unemployment insurance (UI) benefits. They will not be spending those benefits, as they always do, in stores and businesses close to home. Thus there will be no boost for the local economy or help for local businesses to avoid layoffs. More than 2 million people nationwide will lose these benefits if Congress fails to act before leaving for the July 4 recess.

Illinois won’t receive $545 million in desperately needed federal assistance in the coming year, which had been assumed as part of the revenue available to the state in the recently passed budget. This creates the immediate threat of even deeper spending cuts than we’ve already endured. Those cuts also cause private- and public-sector job losses and raise the risk of a double-dip recession as the loss of spending power ripples through the economy. Without more federal aid, state budget-cutting actions nationwide could cost the economy 900,000 jobs in the public and private sectors next year.

Illinois will have to end prematurely its Put Illinois to Work program. This is funded by the TANF Emergency Fund, which would have been extended by the bill the Senate could not vote on. It has already created 22,000 jobs in Illinois through September 2010 and would have created more had it been extended.

Congress should not leave for the July 4 holiday until it extends unemployment benefits, provides additional funding to states, and extends TANF funding for emergency jobs programs. 

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Governor Quinn has closed a gaping loophole in the laws regulating payday loans by signing H.B. 537. Beginning in March, 2011 nearly every short-term credit product sold in the state of Illinois will be regulated.

Governor Quinn, Senator Lightford, Representative Lang, and the members of the Monsignor John Egan Campaign for Payday Loan Reform should be congratulated for the bill’s passage. In particular, the new regulations for loans with terms of six months or more will provide crucial protections for Illinois borrowers. However, the new law is not perfect. The 99% interest rate cap on some loans falls far short of the 36% that is considered safe for consumers. Even with the new protections, payday and consumer installment loans are still best used only as emergency loans of last resort.

As we have discussed in previous posts, H.B. 537 mandates significant reforms. Loans with terms of less than six months have rates capped at $15.50 per $100 borrowed every two weeks. Longer term loans over six months are capped at 99% APR for loans less than $4,000 and at 36% APR for loans more than $4,000. The rates will be calculated in accordance with federal Truth in Lending legislation that ensures lenders cannot use hidden fees to deceptively increase the cost of the loan.

Just as importantly, the new law prohibits balloon payments for all consumer credit products, regardless of the term. With a balloon payment structure, a borrower is typically not allowed to make a partial payment and must either pay the loan in its entirety at the end of the term or, as is often the case, roll the loan over and continue paying interest. Soon all short-term consumer loans in Illinois will allow borrowers to make equal payments over the term of the loan, paying down the principal over time, so that consumers are debt-free at the end of the term.

Lenders will also have to consider a consumer’s ability to repay the loan before extending credit. Monthly payments will be limited to between 22.5% and 25% of a borrower’s gross monthly income. Lending money without taking into account an individual’s ability to repay is a hallmark of predatory lending practices. Finally, and because these regulations will be meaningless if they are not enforced, H.B. 537 creates a consumer reporting service to ensure that lenders comply with all consumer protections.

The hard work of the Monsignor John Egan Campaign for Payday Loan Reform has finally paid off for Illinois consumers.

Hannah Weinberger-Divack co-authored this article.

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The key to limiting the damage caused by payday lenders is tough regulations. Yet, the reason that payday lenders have proliferated in the first place is that there is a large need for small dollar loans. So, in addition to regulating payday lending we also need to increase access to safe, affordable alternatives. Expanding and promoting such alternatives will help to alleviate the financial burden on low-income and low-asset families.

Alternative small dollar loans need to be more than just payday loans lite. Instead they must be structured to ensure that they are safe and affordable. Not all payday loan alternatives are created equal. A new study from the National Consumer Law Center, which evaluated over one hundred existing products, found that there is a wide range of product quality from genuine alternatives and ones that come close to products that are merely payday loans disguised in a different name. Credit unions dominate the genuine alternatives, but some banks are also offering beneficial products.

The authors argue for a real alternative to payday loans that will fill a need for convenient, emergency credit without leaving consumers in worse financial shape than they began. The study clarifies several myths regarding alternative payday loans:

• Just because a product is slightly cheaper does not make it good. A real alternative must be truly affordable.
  
• A small profit margin does not equal a good product. Loans should be judged by their impact on the borrower.
  
• An alternative does not need to be structured like a payday loan. In fact, the classic high fee structure and short repayment period cannot be replicated if we are to create a genuine alternative.
  
• Expensive loans should not be tolerated because there is consumer demand. In many cases payday loans delay tough choices needed to get one’s personal finances back on track and instead can serve to make a bad situation worse.
  

Instead the report suggests that alternatives should contain the following characteristics:

• A genuine payday loan alternative must have no greater than a 36% annual rate, including interest and fees.
  
• A minimum of 90 days loan repayment term in manageable installments.
  
• Must not employ a security method such as electronic access to a bank account that puts money for food and rent at risk. 

Hannah Weinberger-Divack coauthored this post.

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A recent editorial in the Chicago Tribune professes to have some "heart" for the long-term unemployed, but it calls upon Congress to vote down an extension of unemployment benefits anyway. We disagree. Congress should approve the extension as soon as possible.

Some may blame lingering unemployment on the unemployed, accusing them of failing to look for or take jobs "on employers' terms." But the main cause today is that there simply are no jobs. There are currently five workers for every job opening, according to a U.S. Department of Labor survey of employers. In normal times, this ratio is one to one. In the last recession, it was two to one. Employers are not waiting for workers to show up for vacant jobs. There is no relationship whatsoever between unemployment benefits and American productivity; indeed, even if an insured worker fails to take a job (which we do not concede), there are millions of uninsured and unemployed workers to snap them up.

In fact unemployment insurance allows laid-off workers the ability to preserve their retirement accounts and life-insurance policies, it helps them avoid foreclosures and bankruptcies, it maintains a minimally decent standard of living and it keeps them consuming goods and services. They buy things with the benefits at stores who employ people, who get paychecks and who make their own purchases. This "multiplier" effect has been estimated at $1.61 of positive economic impact for each dollar of benefits.

Yes we can and should have a "heart" for these workers, but we should also know that unemployment insurance helps to fight the recession and maintain jobs. Its minimal cost is well worth it.

This post was co-authored by Andrew Stettner, deputy director, National Employment Law Project, and Carrie Thomas, associate director, Chicago Jobs Council.

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Across the country, Americans are shocked and saddened by the seemingly never-ending devastating oil spill in the Gulf of Mexico. The scale of this ongoing catastrophe is difficult to imagine, although it has already harmed hundreds of thousands and will likely affect many more over the next several years.

But what is the unique impact of this environmental disaster on poor people? And how should legal aid advocates be prepared to respond?

Low-income people are likely to be disproportionately affected by economic and health-related impacts of the oil spill. Anecdotal reports are already surfacing. Students at Tulane University, in conjunction with the Louisiana Bucket Brigade, have created an Oil Spill Crisis Map that enables citizens to report how the spill is threatening their livelihoods and local ecosystems. The map visualizes reports of the effects of the BP oil spill on wildlife, residents' livelihoods and health, property, and other indicators.

The Mississippi Coalition of Vietnamese American Fisherfolk and Families reports that Vietnamese Americans in Mississippi are suffering a direct threat to their livelihoods as a consequence of the spill. Eighty percent of Vietnamese households in Mississippi depend on the seafood industry, and 2,000 are employed directly as commercial fisherman, seafood factory workers, and distributors. Barriers to culturally competent interpretation have impeded communication and have kept Vietnamese Americans who can no longer fish from full participation in BP's job training process. The report recommends that fishermen be given urgent financial assistance, including loan deferment and financial counseling; that accessible, "one-stop shops" for assistance with claims filing, job training, and social services be established; and that planning begin immediately on long-term job creation for displaced workers.

Over the longer term, the harmful effects of the disaster on people's health are likely to emerge. In addition to untold barrels of oil, more than 1 million gallons of dispersant Corexit have been sprayed into the gulf since the beginning of the spill. The low-income people who live in coastal communities on the Gulf are likely to be disproportionately affected by these problems because of their lack of access to quality, affordable health care.

The emerging stories of this disaster present just one angle of the likely effects of climate change on low-income people. Although climate change may be viewed by poverty law advocates as unrelated to the day-to-day survival issues facing poor people, nothing could be further from the truth. Not only does climate change affect clients' health and financial security, but also many of the potential responses to climate change may ameliorate certain aspects of poverty, for example, through access to "green" jobs or the expansion of mass transit. The upcoming September-October issue of Clearinghouse Review will explore the effect of climate change on low-income people and the advocacy opportunities that these issues present. In the meantime, we invite you to read an article by Steven Fischbach, Community Lawyer at Rhode Island Legal Services, on "Why Climate Change Issues Are Relevant to Poverty Law Advocates." This free article previews some of the topics that will be covered in more depth in the forthcoming special issue.

The Gulf oil spill will eventually be capped and contained, and the cleanup will continue. Let us learn from this disaster and prepare for the changes ahead that will affect our clients.

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Thousands of homeowners will be getting relief soon if they took out a loan with Countrywide Financial before 2008. Charges against Countrywide, now a subsidiary of Bank of America, are part of the largest mortgage-servicing case ever to come before the Fair Trade Commission (FTC), and one of the largest overall judgments. The New York Times reported that Bank of America will pay $108 million to families who were charged inflated “cost of service” fees such as lawn mowing and property inspection.

Over the past few years, Countrywide has become the poster child for the predatory lending industry and has received much of the blame for the housing crisis. Reports of abuses include the inadequate underwriting of adjustable rate mortgages or ARMs, unhelpful customer service, abysmal record keeping, abusive origination fees, and making false and defaming claims against homeowners who filed for bankruptcy protection.

As part of the monetary settlement, the FTC is requiring Bank of America to establish internal procedures and to use an independent third party to verify that bills and claims filed in Countrywide’s ongoing bankruptcy proceedings are valid. Countrywide also faces a criminal investigation by the Federal Fraud Enforcement Task Force into the defamation charges against it.

Unfortunately, Countrywide is only one of many lenders accused of predatory lending and consumer abuses. Although the FTC has played an integral role in holding Countrywide accountable, these predatory practices still abound in the mortgage industry. We need strong laws that protect consumers; that is why the Shriver Center supports an independent consumer protection agency which will prevent these abuses from happening in the future.

For more information contact the Community Investment Unit at the Shriver Center.

This article was co-authored by Susan Ritacca.

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The General Assembly stands adjourned, for now, as legislators took the half-baked state budget pie out of the oven before it could finish cooking so they could rush off to appear at the Memorial Day weekend parades. 

Heading the list of unfinished business is the failure to provide for paying off the state’s $3.7 billion fiscal year 2011 pension obligation. The Governor had sought authority to borrow these funds, as Illinois did last year, but the General Assembly declined his request. 

Since borrowing authorization requires a 3/5 majority, at least one Republican vote was needed in the House. Two retiring Republicans voted in favor and one Democrat voted against, so the pension borrowing measure cleared the House by the narrowest of margins. In the Senate, however, where no Republican votes were needed (and none were forthcoming), two Democrats blocked approval of the pension borrowing authority on the grounds that it would simply aggravate our fiscal problems without being part of a plan, including a revenue increase, to actually solve our fiscal mess.

So where does the General Assembly’s decision not to approve borrowing authority to cover the FY11 pension obligation leave us? The budget approved by the General Assembly assumes that $6 billion in outstanding bills will be unpaid at the end of FY11. If FY11’s pension payment cannot be borrowed, then another $3.7 billion must be added to the $6 billion in unpaid bills that the budget is predicated on, making the grant total of unpaid bills at the end of FY11 $9.7 billion. Or, the pension funds could cannibalize themselves, selling off investments to meet current obligations and thus dramatically lowering future investment income. Given these unpalatable options, the Senate’s leadership may continue trying to find the one vote needed to approve borrowing $3.7 billion to cover the FY11 pension payment.

The fiscal year 2011 budget passed by the General Assembly (H.B. 859) resembles last year’s. Rather than making line-by-line appropriations as in the past, and as the Governor had proposed, the General Assembly continued last year’s practice of providing lump-sums to the agencies and leaving it to the Governor to decide which programs to fund and which programs to cut. The overall amount appropriated for grants remained about the same as last year but the appropriation for state operations was cut by 5 percent. The Governor was again given $3.2 billion in unallocated funds to spread around as he sees fit. Different state agencies fared differently – the Illinois Department of Human Services, for example, was appropriated only $2.5 billion, $1.5 billion less than its current appropriation of $4 billion, although the Governor can use the $3.2 billion in unallocated funds to cover some or all of this gap.

The General Assembly also passed an Emergency Budget Act, which gives the Governor sweeping powers to make cuts without legislative review (S.B. 3660, House Amdt. 9). It allows him to put more than $2 billion into a contingency reserve that could not be spent by the agencies. It also makes all state programs, whether authorized or required by state law, “subject to appropriation,” i.e., not operational unless supported by an appropriation that is not otherwise obligated or reserved. These emergency powers expire on January 9, 2011, at the end of Governor Quinn’s term.

While abdicating responsibility for making unpopular budget cuts, the General Assembly again avoided consideration of the only viable alternative for solving our budget mess – raising revenue, as the Responsible Budget Coalition has advocated, along the lines of House Bill 174, which would increase the individual income tax rate from 3 to 5 percent and broaden the sales tax base to include services, raising approximately $6 billion in annual revenues. The General Assembly also chose not to capture $320 million in annual revenue from a proposed cigarette tax increase. The General Assembly did approve a tax amnesty plan whereby tax cheats can pay off their debts without penalty, which is estimated to raise $250 million (S.B. 377, H. Amdt. 3). The legislators threw $50 million of this back by approving a “sales tax holiday” for back-to-school purchases in August.

The budget also relies on various one-time revenue sources, including $1.2 billion obtained by borrowing against the proceeds from the remaining 17 years of a tobacco settlement fund.

As the Illinois General Assembly was wrapping up last week, word came that the U.S. House of Representatives had stripped the enhanced Federal Medical Assistance Percentage (FMAP) six-month extension from the unemployment insurance extension package, considered the best vehicle for its enactment. Unless restored by the Senate and agreed to by the House-Senate conferees, or included in a different legislative package, this continuation of ARRA federal fiscal relief to the states will come to an end, blowing another $700 million hole in the FY11 state budget.

In sum, regardless of whether borrowing to pay this year’s pension tab is approved, the state will continue to lack the revenues to pay its bills. By the time this fiscal year comes to a close at the end of June, Illinois will have racked up $6 billion in unpaid bills. The budget proposed by the Governor and approved by the General Assembly assumes there will still be $6 billion in unpaid bills at the end of the next fiscal year in June 2011. Nobody believes that this number will not grow. While the Governor will make some visible cuts to programs, far more insidious and lethal will be the state’s continuing and expanding practice of not paying its bills. State-funded providers of services to young children, the elderly and disabled, the homebound, the developmentally disabled, the mentally ill, those addicted to alcohol and controlled substances and so on will not have the plug pulled on them all at once. Rather, they will die a slow and agonizing death as month by month the state’s payment for services rendered does not arrive and, one by one, they are forced to give up the ghost.   

List of Enacted State Budget-Related Legislation:

• Senate Bill 3660 – House Amendments 1, 9, 12, 14, 17, 18, 19 ( Emergency Budget Act in amendment 9)
  
• House Bill 859 –Senate Amendments 1, 2, 3, 6, 7, 8 – FY11 state budget
  
• Senate Bill 3662 – House Amendments 1, 3 – FY11 state budget implementation act
  
• Senate Bill 1215 – House Amendments 2, 3 – budget trailer bill (technical fixes)
  
• Senate Bill 377 – House Amendments 1, 3, 6 -- tax amnesty
  

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Illinois came one step closer to reforming its payday lending laws this week with the passage of H.B. 537. 

Currently, Illinois law has a toxic loophole as big as the fissure gushing at the bottom of the Gulf, which payday lenders have used to avoid consumer protections. Previous attempts to reform payday lending in 2005 imposed a cap on interest rates for loans less of than 120 days and restricted the number of loans a borrower could take out to two per year. Payday lenders evaded these restrictions by simply increasing the term of their loans. 

Payday loans are predatory short-term, high-interest loans that allow an individual to use a post-dated personal check as collateral. Payday lending is a growing problem; in the mid-1990s there were only a few hundred payday lending stores in the country, and by 2009 over 20,000 payday lending stores were opened in neighborhoods across the U.S.

Measures to limit the cycle of debt that traps many payday loan consumers are sorely needed. An informative and entertaining report from NPR’s Planet Money estimated that 60% of payday lenders’ revenue comes from repeat customers who continuously rollover their loans and rack up huge fees in the process.

On Wednesday, May 26th, a law to close this loophole, H.B. 537, was passed by both houses of the Illinois General Assembly with just one "no" vote. This piece of compromise legislation will overhaul two state laws, the Consumer Installment Loan Act and the Payday Loan Reform Act, to provide strong consumer protections for high-cost installment loans.

H.B. 537 would close the loophole because it:

• Ensures reasonable rates of 36% for installment loans over $4,000, 99% for small consumer loans, and maintains the current rate of no more than $15.50 per $100 per two weeks for payday loans. 
• Limits the cycle of debt by ensuring that lenders cannot make a payday loan to a consumer that would result in more than 180 days of continuous indebtedness. 
• Establishes a consumer reporting database to ensure that consumer protections for payday loans and small consumer loans are enforced.

Illinois has the chance to correct this mistake and finally rein in the predatory lenders. Consumers should urge Governor Quinn to immediately sign H.B. 537. 

This post was co-authored by Hannah Weinberger-Divack.

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