Combating Predatory Lending
For Native Americans, the impact of predatory lending is devastating because it destroys the potential for asset building that is needed to bring economic security to Indian families and communities. First Nations Development Institute’s research has demonstrated that predatory lending is stripping money from low-income tribal citizens, especially those who are unbanked or underbanked. Our studies on predatory lending in Indian Country include best practices to combat abusive lending and prevent the bleeding of assets from Native communities.
Native American Family Economic Security
Native American Family Economic Security: Linking Asset-Building Programs in Indian Country is a two-year project made possible by generous grants from the Bill and Melinda Gates Foundation and the Paul G. Allen Foundation. The grants target two Native communities in Washington and one in Montana. The purpose is to develop, strengthen and expand programs/services that build the family economic security of Native communities through Volunteer Income Tax Assistance (VITA) sites.
Two existing VITA sites – Chief Dull Knife College (CDKC) in Montana and Northwest Native Development Fund (NNDF) in Washington – received grants from First Nations for two years of funding, and one new VITA site – Chehalis Tribal Loan Fund in Washington – recently received funding from First Nations to launch its project. During the first year of the grant, NNDF doubled the number of returns it filed from the previous tax season to total 84 tax returns. They secured more than $100,000 in refunds, brought back nearly $35,000 to their community through the Earned Income Tax Credit (EITC), and saved their clients an estimated $21,000 in fees. Similarly, CDKC filed 439 tax returns, returned more than $1 million back to their community, and secured $431,388 in EITC back to the people of the Northern Cheyenne Reservation. Both existing sites have successfully linked VITA clients to social services using an online social service portal (Bridge to Benefits and Washington Connection), and have also linked clients to asset-building programs such as IDAs, financial education and/or credit repair services.
In August 2012, First Nations held a convening for CDKC, NNDF and Chehalis. In a collaborative small-group discussion, participants exchanged best practices and strategies that would enable them to expand the services offered and the number of individuals served. The two existing sites assumed a mentoring role for the newly established site and imparted sound advice to assist Chehalis in achieving success in its first year. All participants said they greatly valued the open conversation and felt revitalized and ready to have a successful tax season. All grantees are currently preparing for the upcoming tax season.
Model Tribal Code
First Nations Development Institute has produced a model tribal consumer protection code. With funding from the Annie E. Casey Foundation, First Nations worked with staff at DNA People’s Legal Services, Inc. to produce a model tribal code that can be adopted to regulate a variety of activities on reservations. The code provides a legal framework for tribes to regulate economic transactions on their reservations, including a range of credit products such as payday loans. The model tribal code also includes the following chapters:
Bank Payday Lending: A Debt-Trap Wolf in Sheep's Clothing
First Nations Development Institute has joined a national effort to actively oppose “bank payday lending” by established banks and financial institutions. First Nations believes this new practice by large, respected companies will undermine the hard-fought gains made in Native American and military communities and others to curb predatory lending practices that particularly prey on low-income people.
According to Diane Standaert of the Center for Responsible Lending, five large banks are now making unaffordable, high-cost payday loans, typically calling them “direct deposit advances” or “checking account advances." The banks are Wells Fargo, Regions, US Bank, Guaranty Bank, and Fifth Third. She said that with their high fees and a single balloon-payment taken out of a customer’s next direct deposit, these loans create the same debt trap as expensive payday loans made from strip-mall storefront lenders. They may also trigger additional charges such as overdraft fees, and can contribute to the increased likelihood of bankruptcy, late credit card and bill payments, delayed medical care, and even loss of basic banking privileges because of repeated overdrafts.
First Nations has joined the Center for Responsible Lending and a wide range of 250 national, state and local organizations – including consumer advocates, civil rights organizations, faith-based groups and social service agencies – to oppose the practice. They are asking U.S. bank regulators in Washington, D.C., including the Federal Reserve, Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Consumer Financial Protection Bureau, to take immediate action to stop banks from making such loans.
"The very structure of a bank payday loan makes it likely to trap customers in long-term debt even while the bank claims that the loans are meant for short-term use," noted Rebecca Borne, senior policy analyst at the center.
"We recognize the need for emergency credit," Director Richard Cordray of the Consumer Financial Protection Bureau said recently. "At the same time, it is important that these products actually help consumers, rather than harm them."
Combating predatory lending has long been part of the mission of First Nations because it has a tremendously negative impact on Native communities. It is devastating because it destroys the potential for asset building that is critically needed to bring economic security to Indian families and communities. First Nations’ research has shown that predatory lending is stripping money from low-income tribal citizens, especially those who are unbanked or underbanked.
You can support this effort by signing on as an individual, company or organization by contacting Diane at the Center for Responsible Lending at email@example.com. And you can support First Nations in its mission by giving generously online or by mail.
Tax Time Taxing Enough Without Deception
Tax time is taxing enough each year, so why pay more than you have to? First Nations Development Institute conducted research in early 2012 to see if Native American tax filers were being overcharged for tax-preparation services.
With support from the Annie E. Casey Foundation and the W.K. Kellogg Foundation, First Nations carried out a second year of secret shopping during the 2012 tax season to assess the quality of tax-preparation services and to discover if tax-preparation companies were steering people toward expensive products, such as refund anticipation loans or refund anticipation checks.
The most troublesome finding from this year’s research was that tax preparers manipulate clients into signing up for costly products like the Refund Anticipation Check (RAC) or Refund Anticipation Loan (RAL). Three of the 10 participants in our 2012 study were automatically signed up for the RAC option to receive their refunds, through questionable methods used by the preparers. Furthermore, seven of the 10 were offered a RAL loan and all 10 shoppers had some type of exposure to this expensive option through aggressive marketing. We found that some companies used a strategy of only accepting cash upfront for preparation fees, resulting in automatic enrollment of the client in a loan product if he or she did not have cash on hand. Finally, like the RAC disclosure forms, some preparers had our shoppers sign RAL consent forms without any consent.
One of our secret shopper’s experiences exemplified many of the concerning findings from our research. When she applied for a loan against her tax refund, a Social Security card and birth certificate were held as collateral for the loan until she returned to file her taxes with the company. When she later had her taxes prepared by the company, she attempted to pay her tax-preparation fees up front, which would have saved her almost $50. The company informed her that these fees were automatically rolled into her loan product and could not be removed to pay separately. The most significant issue, however, was that our participant was told that her refund came in almost two weeks after the IRS website said it was available. During this time period, our shopper, who had recently become unemployed, decided to take out another loan and the loan company enabled her to apply for another costly loan. This client later filed a complaint against the tax-preparation firm and received a payment from the firm for the fees associated with the third loan.
“We acknowledge that tax preparation firms can provide a valuable service,” said Sarah Dewees, Senior Director of First Nations’ Research, Policy and Asset-Building Programs in New Mexico, “but we expect them to act ethically and in the best interest of their customers. Our research suggests this is not always the case, and instead tax preparers are taking advantage of some Native American tax filers.” To read the reports based on this research, Tax Time Troubles and More Tax Time Troubles, visit our Knowledge Center.
Consumer Protection in Native Communities
In an effort to combat predatory lending and effect change at the federal, state and tribal policy level, First Nations has conducted two groundbreaking studies of predatory lending in Native American communities. The results show that predatory lending is a growing problem for Indians, who generally lack access to lending institutions for a variety of reasons. Based on our studies, First Nations has recommended that tribal nations act to combat predatory lending by:
Building Trust: Consumer Protection in Native Communities
Guide to VITA Site Development in Native Communities
With funding from the W.K. Kellogg Foundation, First Nations is conducting research on successful Volunteer Income Tax Assistance (VITA) sites serving reservation communities, and we are producing a practitioner's guide and providing assistance to pilot VITA site implementation. VITA sites are critical to helping Native communities because they provide a safe alternative to high-fee tax preparation and predatory lending. Research is also being conducted to help policy makers looking to legally limit the impact of predatory lenders.