The Lending Trap by University of Minnesota Hubbard School of Journalism & Mass Communication

Students at the University of Minnesota’s School of Journalism and Mass Communication partnered with MinnPost to explain how the “Lending Trap” has flourished in Minnesota while other states have more strictly regulated what they call “predatory lending.” The series was funded by a grant from the Northwest Area Foundation.

TABLE OF CONTENTS About the Lending Trap Project...............3-4 1 Demand for high-interest loans soars in Minnesota...........................................5-7 2 Big banks’ quick-cash deals: Another form of predatory lending?..........................8-10 3 Minnesotans burned by far-away lender..............................................10-12 4 Some states — not Minnesota — strictly regulate payday lending..........13-15 5 ‘Dual tracking’ trap: Owners lose homes while trying to modify mortgages........16-18 6 As state ages, Minnesota braces for problems with risky reversemortgages.......................................18-21 7 Minorities in Twin Cities more likely to pay for mortgages..................................22-25 8 Federal regulators poised to crack down on payday loans....................................25-26 9 Tips for consumers considering online loans....................................................26 10 Borrowers, beware: Tribal-affiliated loans sound good, but could be costly..........27-29 11 Financial literacy efforts to fight predatory lending flourish in Minnesota..............30-32 12 Minnesota sues online, fast-cash lender..............................................33-34 13 ‘Unbanked’ Minnesotans hurt most by predatory lending..............................35-37 14 New law tightens foreclosure rules in Minnesota.....................................38-39 15 How saving $40 a month can protect from poverty and predatory lending.....40-42

LENDING TRAP PROJECT SJMC Faculty Member

Chris Ison MinnPost Writer

Sharon Schmickle

Jour 5131 Students

Jared Anderson Kevin Burbach Shayna Chapel Jeffrey Hargarten Christopher Heskett Amelia Kaderabek Samantha Labrasca Sarah Rose Miller Cali Owings Kelsey Shirriff Calvin Swanson _________________ Partner

School of Journalism and Mass Communication University of Minnesota sjmc.umn.edu

Partner

MinnPost minnpost.com

Funded by

Northwest Area Foundation nwaf.org

About the Lending Trap Project

The Partnership: As the economy shrunk during the Great Recession that started in 2007, one industry was flourishing in Minnesota – the short-term loan businesses that offer quick cash with exorbitant interest rates. That issue brought together three organizations that share an interest in digging into such social issues. In 2012, MinnPost, an award-winning, nonpartisan news organization based in Minneapolis, received a grant from the Northwest Area Foundation, which supports efforts to reduce poverty across an eight-state region. The grant funded MinnPost’s partnership with the University of Minnesota School of Journalism and Mass Communication (SJMC) to produce an investigative report into what is often referred to as “predatory lending” in Minnesota. Eleven students in the school’s 2012 In-depth Reporting class (Jour 5131) dug into the payday lending industry and its effects on Minnesotans. MinnPost’s Sharon Schmickle, an award-winning reporter formerly with the Minneapolis Star Tribune, was assigned to contribute her own reporting and work with the class along with SJMC faculty member Chris Ison. The students reviewed loan agreements, subprime mortgage documents and court records. They used computerassisted reporting methods to analyze data from the U.S. Census Bureau and the Minnesota Department of Commerce, producing an interactive map showing that many store-front lending shops were located in poor areas. They visited payday loan business and interviewed customers, lenders, consumer advocates, lawmakers and finance experts. “Common wisdom in any newsroom holds that a project of this scope, ambition and duration will demand tenacity and flexibility, as well as the highest journalistic skills

and standards,” Schmickle said. “These students proved they were up to that challenge by every measure. They delivered real substance for these stories, and they stayed on task even when we needed to change course or chase new angles.” The reporting evolved into a series of 15 stories and graphics that ran over several months. The students learned that the demand for short-term loans had doubled during the Great Recession, and that many of those most adversely affected by the high interest rates were minorities and the poor. They learned that mainstream banks offer similar loans with different labels. And they uncovered a loophole in state law that has allowed many lenders to dodge state restrictions, even while other states prohibit similar practices. “The Lending Trap series is an example of how MinnPost’s partnership with the journalism school has helped us dig deeper into issues that our readers and the community care about,” said MinnPost Managing Editor Roger Buoen. The series “documented a serious problem in our community, reporting both on the human toll of these lending practices and the public-policy questions they raise.” The project also furthered SJMC’s long tradition of getting students out of the classroom to work with professionals publishing high-quality journalism for a wide audience. “It puts you in a different mindset when you know you’re working for a professional publication,” said senior SJMC student Kevin Burbach, one of three students who received a MinnPost internship after the semester. “It pushes you to do better work. You know that your stuff is going to go on a website that’s read by thousands of people and not just for a class, and you know it’s going to have a big impact.” The Course: Jour 5131, In-depth Reporting, is an upper-level reporting course and capstone for students nearing the completion of their undergraduate studies at the University of Minnesota School of Journalism and Mass Communication.

About the Lending Trap Project The course has an academic component — studying the best examples of in-depth reporting — and a hands-on component — giving students the opportunity to exercise what they’ve learned in the journalism program by reporting and writing for a professional publication. Students identify and pitch story ideas, produce graphics and photographs, learn a thorough fact-checking process and experience professional editing. Past classes have reported on a lack of training and standards among language interpreters in Minnesota’s medical industry, abuse of ADHD drugs among high school students, problems in the state’s immigration courts and problems caused by a lack of funding for the Minnesota Public Defenders Office, among others. Jour 5131 class members: Jared Anderson, Kevin Burbach, Shayna Chapel, Jeffrey Hargarten, Christopher Heskett, Amelia Kaderabek, Samantha Labrasca, Sarah Rose Miller, Cali Owings, Kelsey Shirriff and Calvin Swanson. Three students, Jeffrey Hargarten, Kevin Burbach and Sarah Rose Miller, received one-month internships at MinnPost to continue the work on the series, in addition to working on some unrelated stories. Chris Ison, the instructor for the class, was the Assistant Managing Editor for Investigative Projects at the Star Tribune in Minneapolis from 2001-2004. He was a reporter on the Star Tribune’s investigative team, and also covered federal agencies, casinos and local

government. He also covered states politics, local government, police and courts for the Duluth News Tribune from 1983-1986. Ison and fellow reporter Lou Kilzer won a Pulitzer Prize for Investigative Reporting in 1990 for a series of stories on arson and links between the St. Paul (Minn.) Fire Department and profits from arsons and suspicious fires. His stories have won various national and state awards, including awards from Investigative and Editors, the National Press Club, the Associated Press and other organizations. He supervised projects that won national awards from the Society of American Business Editors and Writers and the Society of Professional Journalists. Sharon Schmickle of MinnPost is an award-winning journalist with 30 years of experience covering local, national and international news. Until 2007, Sharon was a reporter for the Star Tribune, where she covered national politics for the Washington, D.C., Bureau during the 1990s and covered wars in Iraq and Afghanistan during the 2000s. She has reported from 25 countries on stories ranging from a tsunami in Thailand to restless youth in Egypt to an agricultural crisis in Kenya. As a MinnPost writer, she has covered science, politics, government and international news. She also provided in-depth analysis of issues through a series of profiles.

Photo by Sarah Howard

SJMC students work on a news story.

Demand for high-interest payday loans soars in Minnesota Published Jan. 28, 2013

This article was reported and written by Jeff Hargarten, Kevin Burbach, Calvin Swanson, Cali Owings and Shayna Chapel. The article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is the first in a series of occasional articles funded by a grant from the Northwest Area Foundation. Call it predatory lending. Or call it financial service for the neediest. Either way, more Minnesotans are turning to high-interest payday loans and other services outside the mainstream banking system, controversial enterprises that operate through a loophole to dodge state restrictions. On a typical morning throughout Minnesota, customers stream into any one of some 100 storefronts where they can borrow hundreds of dollars in minutes with no credit check – at Super Cash on the north side of Bloomington, for example, at Ace Minnesota Corp. on Nicollet Avenue in Richfield and across the metro on Roseville’s Rice Street at PayDay America. The demand for these loans doubled during the Great Recession, from 170,000 loans in 2007 to 350,000 in 2011, the highest reported to the Minnesota Department of Commerce in state history. While 15 other states forbid such lending practice, Minnesota lawmakers have been largely unsuccessful in several attempts to crack down here. Some lenders have used the loophole to charge higher rates and grant bigger loans than state lawmakers had previously allowed. And they have successfully lobbied against tighter rules. Their Minnesota borrowers paid fees, interest and other charges that add up to the equivalent of average annual interest rates of 237 percent in 2011, compared with typical credit card rates of less than 20 percent, according to data compiled from records at the Minnesota Department of Commerce. The rates on loans ranged as high as 1,368 percent. In all, Minnesotans paid these high rates on $130 million in such short-term loans in 2011, some of it to companies headquartered outside Minnesota. That is money the borrowers did not have available to spend at local grocery stores, gas stations and discount shops. “This exploitation of low-income consumers not only harms the consumer, it also places a needless drag on the economy,” wrote Patrick Hayes, in an article for the William Mitchell Law Review. Now, the fast-cash loan business has expanded in Minnesota and nationwide with large conventional banks – including Wells Fargo, U.S. Bank and Guaranty Bank in Minnesota – offering high-cost deposit advances that function much like payday loans. This is the first in an occasional series of reports exploring questionable lending practices in Minnesota and what is being done about them.

MinnPost photo by Jeff Hargarten

On a typical morning throughout Minnesota, customers stream into any one of some 100 storefronts where they can borrow hundreds of dollars in minutes with no credit check.

Filling a need? Or preying on the needy? Short-term lenders and their supporters insist that their loans are helpful services in cases of emergencies and other needs for quick cash. They fill a gap for people who don’t qualify for full banking service. “We are supplying a service that the consumer can’t get somewhere else,” said Stuart Tapper, vice president of UnBank Co., which operates UnLoan Corp., the third largest payday lender in Minnesota. The lenders also dispute the emphasis critics have placed on annual percentage rates because borrowers can pay less in interest if they pay off the loans on time, typically two to four weeks. However, critics say the payday lending business model depends on habitual customers taking multiple loans a year. Of some 11,500 Minnesota borrowers who obtained short-term loans in 2011, nearly one-fourth took out 15 or more loans, according to the state Commerce Department. “Once somebody gets a payday loan, it’s a vicious cycle,” said RayeAnn Hoffman, company director of Consumer Credit of Minnesota. “You borrow the $350, and you have to pay it again in two weeks and take out another one.” By the time Hoffman sees them, many are in deep financial trouble. “A lot of people call me with two, three and four payday loans going at once,” she said. The few-questions-asked convenience and friendly

service are powerful draws, in particular to low-income people who’ve been turned away from conventional banks and who lack other financial resources. Angelia Mayberry of South Minneapolis takes out a $200 to $300 loan from Payday America every month. She praised the company for helping her and for its easy process. Mayberry pays a package of fees and interest rather than the typical interest on a conventional loan. She said she doesn’t know how much interest her payments would add up to, but on its website, Payday America has listed equivalent annualized rates ranging from 228 percent to more than 700 percent. “All I needed was a couple of references, a job and a checking account,” Mayberry said. Payday lenders also provide other financial services. Customers go to these locations to cash checks, to send funds to various international locations and to pay bills by turning cash into checks.

Meanwhile, none of the companies that chose to do business licensed under the more restrictive Consumer Small Loan Lender Act has cracked the top five of Minnesota’s payday lenders in terms of earnings. In short, the shift to the Loan and Thrift designation enabled short-term, high-interest lending to thrive in Minnesota even though the state moved to limit payday lending – and while many other states outright banned the business. None of them is licensed by the state as a payday lender. Instead, all three are licensed as Industrial Loan and Thrift operations — a designation created decades ago by the Legislature. Initially the designation was not intended to apply to payday loans, but now it is used as a loophole enabling lenders to offer larger loans and charge higher rates to Minnesotans. To understand that distinction, you have to go back to 1995 when the Legislature moved to minimize payday lending in the state. It created the Consumer Small Loan Lender Act, which regulated payday lending, capping the maximum amount of an individual loan to $350. Interest also was to be limited. “But the payday lenders are able to exploit it and are able to dodge the regulation that Minnesota decided it wants on payday lending by getting out from under the payday lending statute,” said Rep. Jim Davnie, DFL-Minneapolis. “It’s very problematic,” Davnie said. “It’s perfectly legal and an abuse of the legal system at the same time.” Companies operating as Industrial Loan and Thrifts don’t have the same statutory cap on the size of loans they can offer. Under that license, for example, Payday America offers loans of $1,000. And so, the state’s three leading small-loan providers switched to Industrial Loan and Thrift licenses. “Why would a payday lender not want to have that license?” said Tapper at UnBank. “Just your flexibility and what you can do is much greater with an Industrial Loan and Thrift license than it was with a small-loan license.” Apparently, the shift was profitable. In 2011, the top five industrial loan companies issued 247,213 loans totaling $98.7 million. Among them, Payday America, Unloan and Ace Minnesota earned about $6 million, $3.3 million and $1 million respectively from 2011 operations, according to their reports to the Commerce Dept. Meanwhile, none of the companies that chose to do business licensed under the more restrictive Consumer Small Loan Lender Act has cracked the top five of Minnesota’s payday lenders in terms of earnings. In short, the shift to the Loan and Thrift designation enabled short-term, high-interest lending to thrive in Minnesota even though the state moved to limit payday lending – and while many other states outright banned the business.

The lingering loophole The three major fast-cash lenders operating in Minnesota — Payday America, Ace Cash Express and Unloan — have dominated the state’s payday lending market for years. Together they made more than $10 million in 2011. Payday America — the largest of all — earned about $6 million that year. None of them is licensed by the state as a payday lender. Instead, all three are licensed as Industrial Loan and Thrift operations — a designation created decades ago by the Legislature. Initially the designation was not intended to apply to payday loans, but now it is used as a loophole enabling lenders to offer larger loans and charge higher rates to Minnesotans. To understand that distinction, you have to go back to 1995 when the Legislature moved to minimize payday lending in the state. It created the Consumer Small Loan Lender Act, which regulated payday lending, capping the maximum amount of an individual loan to $350. Interest also was to be limited. “But the payday lenders are able to exploit it and are able to dodge the regulation that Minnesota decided it wants on payday lending by getting out from under the payday lending statute,” said Rep. Jim Davnie, DFL-Minneapolis. “It’s very problematic,” Davnie said. “It’s perfectly legal and an abuse of the legal system at the same time.” Companies operating as Industrial Loan and Thrifts don’t have the same statutory cap on the size of loans they can offer. Under that license, for example, Payday America offers loans of $1,000. And so, the state’s three leading small-loan providers switched to Industrial Loan and Thrift licenses. “Why would a payday lender not want to have that license?” said Tapper at UnBank. “Just your flexibility and what you can do is much greater with an Industrial Loan and Thrift license than it was with a small-loan license.” Apparently, the shift was profitable. In 2011, the top five industrial loan companies issued 247,213 loans totaling $98.7 million. Among them, Payday America, Unloan and Ace Minnesota earned about $6 million, $3.3 million and $1 million respectively from 2011 operations, according to their reports to the Commerce Dept.

Secret in plain sight Consumers can’t decipher between those under the payday lending act and those using the loophole. Still, the loophole is no secret to policy makers. In recent years, some legislators have tried — and failed — to eliminate the loophole. In 2008, a group of DFL lawmakers pushed legislation to eliminate the loophole and rein in payday lenders or ban them completely. One bill — introduced by Davnie and Sen. Sandy Pappas, DFL-St. Paul — would have placed all payday lenders

under the original 1995 payday lending act and closed the loophole that allows for Industrial Loan and Thrifts. A second -- introduced by Rep. Steve Simon, DFLSt. Louis Park, and Sen. Linda Higgins, DFL-Minneapolis -- would have limited interest rates for all loans in Minnesota to a 36 percent Annual Percentage Rate (APR) and allowed for borrowers to pay back loans incrementally — something not currently offered by lenders. Neither bill made real headway. And nothing similar has been passed since. Regulation proponents did manage to pass legislation in 2009 that tightened reporting requirements for payday lenders. The bill also prohibited aggressive debt collection tactics by payday lenders. Local face of payday lending The failed bills were vigorously opposed by the owner and CEO of Payday America, Brad Rixmann. Testifying in 2008, he told a legislative committee that proposed regulations would push him out of business and force borrowers who depend on his services to “turn to illegal and unregulated sources of ready cash.” Rixmann is the local face of payday lending. He declined to be interviewed for this story. His company is the small-loan subset of the larger Pawn America. With at least 15 locations in Minnesota, Payday America is the biggest payday lending company in the state. Rixmann has donated increasingly to Minnesota political campaigns, giving more than $150,000 in 2011 and 2012 for state and federal races. His company also registers lobbyists to work on issues at the state level, according to the Minnesota Campaign Finance and Public Disclosure Board. Although he’s contributed to both Republican and Democratic campaigns, the majority of donations head to Republicans. In his testimony, Rixmann said the regulations in place were effective and that Minnesota has stronger restrictions on payday than neighboring states like Wisconsin and the Dakotas. “The few number of defaults and complaints indicate that the current legislative and regulatory system is working,” Rixmann said.

Screen grab of interactive graphic on website. Jeff Hargarten is an intern at MinnPost and a journalism student at the University of Minnesota. Alan Palazzol is an interactive developer at MinnPost focused on open source software, data visualization, and mapping.

(Commerce officials withheld names and other personal information on the complaints MinnPost obtained through a request under the Minnesota Data Practices Act.) The Hopkins borrower said that after he took out the Cash Central loan he lost hours at a part-time retail job and couldn’t keep up with payments. “I have to[o] many loans outstanding,” he said. “It is very sad that this has to happen to me, but I got suckered into a trap.” One reason payday lending thrives is that it attracts people in Minnesota’s fastest growing population: minorities and the poor – people who often are shut off from mainstream banking for one reason or another. Increasingly, though, Minnesotans with access to mainstream banks also are tempted to borrow through products very similar to payday loans, high cost included. The next installment of this series will report on that controversial development.

‘Suckered into a trap’ However, advocates for the legislation called the shortterm consumer loan business predatory. Consumer advocates worry that these lending practices harm borrowers, alleviating financial problems only briefly and prolonging deeper dependence on easy but costly cash. “By definition, [payday borrowers] are the most vulnerable, financially vulnerable, in our society,” said Ron Elwood, a St. Paul-based attorney who has lobbied extensively for tighter regulations on payday loans. “And then you keep stripping assets away and it makes it virtually impossible for anybody to stay even, let alone get ahead.” Indeed, complaints sent to the state Commerce Department indicate that some borrowers eventually are caught in a loan trap where they are hounded for payments that have snowballed far beyond their financial reach. “They called me many times at home . . . and my cell phone,” complained a borrower from Hopkins who fell behind on payday loans, including one from Cash Central, a Utah-based company that is licensed to lend in Minnesota.

Big banks’ quick-cash deals: Another form of predatory lending? Published Feb. 4, 2013

This article was reported and written by Kevin Burbach, Jeff Hargarten, Christopher Heskett and Sharon Schmickle. The article was produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. They’re not called payday loans. Instead, big banks give these quick-cash deals more respectable-sounding names: “Checking Account Advance” at U.S. Bank, “Direct Deposit Advance” at Wells Fargo and “Easy Advance” at Guaranty Bank. But those labels amount to a distinction with little meaningful difference, say consumer advocates, who point out that the annualized percentage rates of those advances can run well over 300 percent. “These electronic payday loans have the same structure as street corner payday loans – and the same problems,” the Center for Responsible Lending said in a report on the expansion by the banks into fast-cash loans. In a nutshell, these loans allow regular bank customers to borrow, typically up to $600, on their next scheduled direct deposits of – say, a paycheck, a Social Security check or a pension payment. The bank automatically repays itself and also collects a fee once the deposit arrives in the account. While acknowledging that such a loan is an expensive form of credit, banks insist that it also serves customers who find themselves in unusual financial straits. “It is designed to help customers get through an emergency situation – medical, car repairs, etc. – by providing short term credit quickly,” said Peggy Gunn, who directs corporate communication for Wells Fargo’s Minnesota region. That explanation doesn’t satisfy the folks who counsel Minnesotans with deep financial problems. Several organizations in the state have joined a national call for federal regulators to crack down on the loans, arguing that they are just another form of predatory lending. “At face value, the loans provide quick assistance to households who are struggling to make ends meet,” said Pam Johnson, who directs research for St. Paul-based Minnesota Community Action Partnership. “But through our work and personal relationships with thousands of low-income Minnesotans, we know that household situation 30 days after the payday loan has not changed, and they will be unable to pay the loan on time,” Johnson said via email. “This often results in an ongoing cycle of debt at extremely high interest rates that pushes families into desperate situations including foreclosure, bankruptcy and homelessness.”

REUTERS/Chris Keane

“(The loan) is designed to help customers get through an emergency situation — medical, car repairs, etc. — by providing short term credit quickly,” said Peggy Gunn, who directs corporate communication for Wells Fargo’s Minnesota region.

Call to federal regulators Last year, Minnesota Community Action Partnership joined 249 other organizations nationwide in a letter to federal regulators, urging them to stop banks from making such loans. Other Minnesota signatories included Lutheran Social Service of Minnesota, St. Paul-based Jewish Community Action and several law firms and other organizations that work on behalf of immigrants, minorities and low-income families. Jewish Community Action has seen that “this type of lending targets communities of people who are at a disadvantage in terms of the financial information that they have available to them,” said Carin Mrotz, explaining the organization’s interest in signing the coalition’s letter. She directs the organization’s operations and communications. In May, the FDIC’s acting chairman, Martin Gruenberg, responded to the coalition’s letter, saying : “The FDIC is deeply concerned about these continued reports of banks engaging in payday lending.” His response was addressed to Lisa Donner, executive director of Americans for Financial Reform, one of the lead organizations in the coalition. Gruenberg continued: “Typically, these loans are characterized by small-dollar, unsecured lending to borrowers who are experiencing cash-flow difficulties and have few alternative borrowing sources. The loans usually involve high fees relative to the size of the loan and, when used frequently or for long periods, the total costs to the borrower can rapidly exceed the amount borrowed.” Finally, he said, “I have asked the FDIC’s Division of Depositor and Consumer Protection to make it a priority to investigate reports of banks engaging in payday lending and

recommend further steps by the FDIC. In response to MinnPost’s request about the status of the investigation, FDIC spokesperson LaJuan Williams-Young said last week, “The FDIC does not comment on specific investigations.”

appreciate having it available to them for emergency use,” she said. Under Wells Fargo’s Direct Deposit Advance program, some customers who qualify can repay their outstanding advances in small payments over a longer period of time rather than the single lump-sum withdrawal from the next deposit, Gunn said in an email response to MinnPost’s questions. Like U.S. Bank, Wells Fargo said it limits the loans in order to discourage their use as a solution to long-term financial problems. On a website, Wells Fargo says a borrower who has used the advance for six consecutive statement periods must “take a break” for at least one statement cycle, typically a month. Guaranty Bank sets the same limits, according to its website, and it urges borrowers to seek funds from alternative sources such as credit cards or loans from relatives. “We discourage regular, repeated use of the Easy Advance Service,” it says. At the same time, though, it touts the loans as “convenient” and “quick and easy.” The banks stress that their short-term advances still are cheaper than typical storefront payday loans. “Direct Deposit Advance differs from a payday loan in several important ways,” said Gunn at Wells Fargo. “The Direct Deposit Advance fee is less than the average payday loan fees,” she said. “The industry average on payday loan charges is $17.00 per $100.00 borrowed compared to our $7.50 Advance Fee per $100.00 borrowed.” The FDIC has called repeatedly over the years for an altogether different option. It wants banks to issue unsecured, small-dollar loans with annualized interest rates no higher than 36 percent. The loans should be structured, it has said, in a way that borrowers could pay down principal over about 90 days rather than as a lump sum withdrawal from their next deposit.

Fees and more fees Starting in 2008, big banks saw sharp declines in the more than $30 billion they collect each year in overdraft fees, according to The American Banker. Federal officials had tightened rules for the fees, and consumer groups had won court challenges to a practice in which some banks had arranged consecutive overdrafts in a pattern that maximized fees. Not surprisingly, studies had shown that the overdraft fees fell disproportionately on low-income customers and senior citizens. Now, consumer advocates accuse the banks of trying to make up for the decline of a lucrative revenue source by steering those same customers to high-cost deposit advances. In their defense, banks said the emergency loans are less expensive than overdrafts. But overdraft fees are rising again. And research by three professors at the Harvard Business School shows that the availability of payday-style loans did not spare borrowers from costly overdrafts, as banks have claimed, but instead drove them eventually to more overdrafts. In other words, those borrowers were more likely in the long run to pay expensive advance loan costs and hefty overdraft fees too. After exploring other possible explanations for that development, the Harvard researchers said that “the presence of this high-cost short-term credit adds to the over-extension of household budgets, and exacerbates the rate at which households overdraw their accounts.” That study and others like it led the Center for Responsible Lending to conclude: “Because customers must use such a large share of their incoming paycheck to repay the loan, they will often run out of money again before their next payday, forcing them to take out another loan and starting a cycle of borrowing at high rates.”

True cost? Garrison-Sprenger at U.S. Bancorp said that it “is not fitting” to project an annual percentage rate for the current system of deposit advance loans because the charge is a flat fee – at U.S. Bank, $2 per $20 advanced -- which must be repaid from the next direct deposit. That assertion is where the debate begins. Attorneys at the National Consumer Law Center say that the fee-based structure is nothing but a disguise for tripledigit annualized interest rates. They calculate that a $400, 10day loan at U.S. Bank comes at an annualized percentage rate of 365 percent. At Wells Fargo, where the fee is $1.50 for every $20 borrowed, the rate on the same loan would be 274 percent, they calculate. Such a conversion is slippery to nail down to one rate, though. Let’s say your employer is due to deposit your next paycheck in five days. Your car breaks down today and you take one of these quick-cash loans from your bank to cover the $400 repair costs until payday. Unlikely as it may seem, let’s say that your neighbor has the same bad luck on the same day. Her car breaks down, and her Social Security check isn’t due for 25 days. The fee would be the same in both cases. But your neighbor got to keep the $400 five times longer than you did. So, effectively, your annualized rate would have been far higher than hers. Critics of these loans say that neither of you would have been likely to fully settle the debt on that first due date.

Debt cycle or safety net? The banks disagree. They insist that their loans come with safeguards intended to avoid the pitfalls of storefrontstyle payday lending in which borrowers sometimes sink into unmanageable debt by seeking new loans to meet payments on old obligations. “Checking Account Advance is a safety net for our customers who have experienced an unexpected expense such as a medical emergency or an auto repair,” Nicole GarrisonSprenger, vice president for Corporate Public Relations at U.S. Bancorp, said in an email response to MinnPost’s questions. Borrowers are warned each time they use the advance that it is high-cost credit intended to be used only for shortterm needs, she said. They also are informed about alternative credit options that may be available. And the bank imposes mandatory “cooling off” periods as well as limits on the amount and duration of the advance. “A small percent of our customers use CAA, but those who have give the product overwhelmingly high marks and

Source: Center for Responsible Lending

Note: The Federal Deposit Insurance Corporation has urged banks to offer small-dollar, unsecured loans with annualized interest rates of 36 percent or less.

“The banks permit customers to remain trapped in these . . . loans month after month, even while they claim that ‘installment options’ or ‘cooling-off periods’ make this highcost product acceptable,” the Center for Responsible Lending said in its report. The center found that “bank payday borrowers are in debt for 175 days per year.” Those borrowers typically were financially vulnerable to begin with, said Pam Johnson at Minnesota Community Action Partnership. What’s needed instead, she said, is access to lowinterest loans that could help such borrowers achieve greater economic stability. Lacking that access, it isn’t borrowers alone who suffer the consequences of the debt trap. “Communities are impacted negatively by the loss of assets . . . and the need for increased public assistance,” she said.

Minnesotans burned by far-away online lenders Published Feb. 11, 2013

By Jeff Hargarten

However, they have launched a crackdown against predatory lenders who operate from Malta, the West Indies and other far-away places to lure borrowers into loans with annualized interest rates topping 1,500 percent – and, even, into granting access to bank accounts, paychecks and other personal financial information that all too often falls into the hands of scam

This article was supervised by MinnPost journalist Sharon Schmickle and produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication. It is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. “They have been harassing me at work and I have indicated to them on several occasions that I can’t receive non-emergency calls at work and they are quite aggressive . . . threatening to send a constable to my job to serve me papers,” a St. Paul resident complained. “I have been paying . . . $90 every 14 days and none of it went towards the principal of $300,” a Glencoe resident wrote. “I hope their harassment stops soon,” a Shakopee resident wrote. Minnesota authorities haven’t released names of the dozens of state residents who have filed complaints about online payday lenders.

artists. Most web-only, fast-cash companies operate illegally when lending to Minnesotans because, with a few exceptions, they have not obtained the required state licenses and they violate state rules such as caps on interest and fees they can charge. “Unlicensed Internet lenders charge astronomical interest rates, and many consumers who have applied for loans on the Internet have seen their private information end up in the hands of international criminal fraud rings,” Minnesota Attorney General Lori Swanson said in a statement. “People should not take out loans from unlicensed Internet lenders, period,” she said. Expanding in tandem: industry and fraud The Great Recession left Americans scrambling to solve personal financial crises and find new means to scrape by. For some, that meant turning to small payday loans.

Until recently, those borrowers typically walked into a physical storefront. But that’s changing as lenders aggressively target consumers who go online to research financial decisions and to shop. Search online for answers to credit questions, and you are likely to be inundated with ads for payday loans, some with messages like this: “Cash loans can help when bills come out of nowhere.” Scroll down a bit, and you see that such “help” comes at a hefty cost: the annualized percentage rate is 573.05%. Despite high costs, more and more borrowers are falling for that lure of easy money – filling out online loan applications and sending private financial information to far-away strangers. Those strangers on the other end of the transaction often are elusive even in the physical places where they are located. Some establish bases in one state or country but lend money to residents elsewhere, a practice that helps them escape local laws. The strategy apparently works for those companies. Online lenders have increased their sales considerably over the past six years, according to industry analysts. In 2006, before the start of the financial downturn, the national volume of Internet short-term loans was $5.7 billion, according to a report issued last November by Mercator Advisory Group, an industry research firm. By 2011, the report shows, that number had grown by more than 120 percent to $13 billion. Just as online payday lending is growing, so is concern among analysts over the risk of fraud. Online anonymity has provided shelter for identity thieves and other scammers, the report said. Of the 12 million Americans who took out payday loans in 2010, almost one fourth borrowed from online lenders, according to a 2012 study by Pew Charitable Trusts. Massive fees, privacy breaches, harassment What’s true nationwide also is true proportionally in Minnesota, where demand for quick loans skyrocketed during the Great Recession. (For more detail, see the first installment of this series.) State regulators can’t say for sure how much borrowing grew during that period in the illicit online industry, but they do know that residents seeking to plug financial holes have fallen victim to massive fees, privacy breaches and harassment. Attorney General Swanson’s office has taken action against several online operations, accusing them of defrauding consumers. In December, for example, she settled with an unlicensed payday lender charging state residents interest rates reaching 1,564 percent. The company, Sure Advance, LLC, was forced to pay $760,000 in restitution, and it was restricted from doing business in Minnesota unless it obtained the proper registration and complied with state lending regulations. Sure Advance, LLC, was forced to pay $760,000 in restitution.

The Delaware-based company had granted more than 1,200 loans to Minnesota residents, before the attorney general filed suit in September 2011, alleging Sure Advance had violated state payday lending laws. The Consent Decree and Order entered in Hennepin County District Court says that the company agreed to its terms “without admitting liability.” Prior to settling that case, Swanson’s office had sued eight other unlicensed Internet lenders, including three in 2010, for similar practices. Sucked into the debt spiral Most online lenders secure the borrowers’ future paychecks to repay the loans, operating under the expectation that funds will be available in a given bank account come payday. After the customer enters personal information, including Social Security number, the loan usually is deposited into his or her account within hours. Then the lender withdraws the loan repayment and interest from the borrower’s bank account on the agreed-upon date. But the typical transaction doesn’t end that neatly. The lenders’ business model works most profitably when borrowers can’t catch up on payday and end up seeking repeated extensions on the loans. Indeed, borrowers face a constant drumbeat from lenders to refinance existing loans, causing the initial sum borrowed to balloon into a far larger debt. In addition to high interest rates, the dangers associated with unlicensed online payday lenders include unauthorized bank withdrawals, illegal debt collection tactics, phony collection scams and automatic loan extensions which pile interest charges ever higher. The Minnesota attorney general has sued several companies in recent years for demanding high-interest payments that were illegally extended across multiple paychecks. And it has received a rash of complaints about phony debt-collection calls from international criminal fraud rings. After consumers enter private data into the website of an online lender, so-called phantom debt collectors falsely tell the consumers that they owe money on a loan and will be arrested or jailed if they don’t immediately pay it back. Another type of fraud, advance-fee Internet loans, has also been on the rise, regulators say. Some payday scam

Even companies that were licensed to operate in Minnesota generated complaints about heavy-handed collection tactics. A 2011 complaint filed against Cash Central, a Utahbased company licensed to operate as a Minnesota payday lender, prompted a response from Swanson’s office: “[The resident] was making regular payments on this loan, but he is now in a financial hardship and unable to continue making payments. [The resident] is now receiving collection calls, and he wants these calls to cease immediately.” Against state law

REUTERS/Darrin Zammit Lu

Minnesota authorities have launched a crackdown against predatory lenders who operate from Malta and other far-away places.

websites ask the borrowers to pay upfront fees before money will be advanced. They collect the fees and then disappear without the borrower ever seeing any loan money. Fees, overdrafts and unauthorized withdrawals The tactics have prompted Minnesota consumers to file official complaints about high fees and shady dealings associated with online loans. During 2010 and 2011, Minnesotans filed 58 complaints against payday lenders, many of them Internet based, according to the Minnesota Department of Commerce. MinnPost, through the Minnesota Data Practices Act, obtained copies of some of those complaints on which names and other personal information had been concealed. A Maple Grove resident complained in February 2012 about being charged $105 in fees for a $350 loan from Utahbased Omega Investments, Ltd., LLC. Another customer in Mora, Minn., allegedly received a $400 loan from Oklahomabased AmeriLoan and was assessed $120 in fees. Some saw unexpected fees tacked on to loan payments and withdrawals. One lender, Loan Shop Online, allegedly charged fees each time a payment wasn’t cleared, overdrawing one customer’s Bank of America account by $1,200. Most of the debt was from a string of $35 fees for insufficient funds. The borrower said in the complaint that Loan Shop was “continually making daily and weekly unauthorized” withdrawals from the account “in order for them to get their money.” Many of the borrowers did not discover that the online lenders were violating Minnesota law until after they had taken the loans. “I borrowed money from this company, not knowing about their business. I found out MN law only allows $350 loans online and a limited interest,” said a complaint against Loan Shop Online filed by an Arden Hills resident. “ I realize I should have done more research about them before transacting any business,” said a 2010 complaint filed against Northway Credit Corporation based in Malta.

While online lenders have claimed exemption from various state regulations, a Minnesota law requires Internet payday loan companies to register with the state and comply with its rules regardless of where they are based. State law also caps the fees that can be charged on payday loans. Lenders are not supposed to charge more than 33 percent annual interest and a $25 fee on loans between $350 and $1,000. For loans under $350, the state has set a sliding scale of the interest and fees allowed; it is far lower than most online lenders were charging. Minnesota authorities have caught online payday loan companies charging $30 in interest on $100 two-week loans, amounting to a 782 percent annualized rate, according to the attorney general’s office. One lender, Global Payday, had been charging rates amounting to the equivalent of a whopping 2,737 percent annualized interest on a four-day loan. The online loan industry itself also has sought to battle rampant fraud in its ranks. In 2005, the Online Lenders Alliance was formed to standardize practices among Internet lenders and combat deceptive companies that have tarnished the industry’s reputation. Meanwhile, Congress has proposed legislation to force some reform in the online payday loan industry. The Stopping Abuse and Fraud in Electronic Lending Act, or simply the SAFE Lending Act, was introduced in Congress late last year. The legislation aimed to close loopholes used by some online payday lenders. Similar to Minnesota’s law, the federal statute would require lenders based offshore or in other states to abide by local lending laws where the borrower resides. Rep. Keith Ellison (D-Minn.) is a co-sponsor of the House version, which has not yet come up for a vote. Back in Minnesota, the Commerce Department has joined the effort to crack down on unlicensed payday lenders. Four companies based in Utah, Delaware, Oklahoma and Nevada were caught in the department’s net for allegedly operating without proper licenses, yet lending to Minnesota borrowers online anyway. “We are working to protect Minnesota consumers from unlicensed payday lending companies that take advantage of them,” Commerce Commissioner Mike Rothman said in a statement. “Payday lending companies -- online and down the street -- need to obey the lending laws that protect consumers.” A few Internet lenders are licensed to do business in Minnesota. They include CashCentral.com and CheckCity.com based in Utah and CashNetUSA.com out of Chicago. You can check the Commerce Department’s website to find out whether any lender is licensed with the state. Or you can call the agency at 651-296-4026.

Some states — not Minnesota — strictly regulate or ban payday lending Published March 6, 2013

By Kevin Burbach This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is the first in a series of occasional articles funded by a grant from the Northwest Area Foundation. Let’s say your car broke down, and you need quick cash to pay the repair bill. If you were in Missouri, you could turn to a payday loan shop. But it would cost you plenty. State lenders can charge up to $75 for every $100 borrowed -- which is close to a 1,950 annualized percentage rate, the common guide for measuring interest. If you were in Arizona, though, you’d have to look elsewhere for a fix. Out of concern that predatory lenders were gouging consumers, Arizona and several other states have outlawed payday lending outright or else set low limits for interest rates and loan amounts. Some never legalized that form of lending in the first place. Those two examples define the bookends for the range of state payday lending regulations across the United States. Minnesota sits in the middle of that range, not the strictest state by any means, but not as lenient as many others. Consumer advocates and some state lawmakers say the middle isn’t good enough for Minnesota, a state that has led high-profile crackdowns on consumer fraud over the years and also passed laws protecting consumers from false advertising, high-pressure sales pitches and a long list of other questionable practices. “Minnesota used to be one of the most consumerfriendly states but I don’t think we’re anywhere near that anymore,” said state Sen. John Marty, DFL-Roseville, a legislator who has signed onto several bills in the past that would tighten payday lending regulations in the state. “We’re not a leader in this for sure,” he said. Permissive to restrictive Nearly every state has some regulation on highinterest, short-term loans, or payday loans. But borrowers can get a much better deal in some states than in others. Beyond the terms of the loans, tough state regulations also prompt significant numbers of borrowers to turn away from payday lenders and seek other solutions to cash needs, according to a 2012 report by Pew Charitable Trusts. Pew researchers placed 28 states into the category of what it defines as “permissive,” including seven states that set no interest limits at all on payday loans. Eight, including Minnesota, are considered “hybrids,” or states that allow payday storefronts to operate but limit fees and amounts that can be borrowed. Fifteen, including Washington D.C., ranked as “restrictive” states where payday loan storefronts don’t exist,

although some payday lenders operate online often in violation of state laws. Borrowing was far lower in restrictive states, the Pew researchers concluded. For example, just 2 percent of the people surveyed in Massachusetts and 1 percent of those in Connecticut (restrictive states) borrowed from payday lenders, compared with 4 percent in Minnesota (a hybrid state). Borrowing trouble In a more recent installment of a series of studies called Payday Lending in America, Pew summarized the reasons regulators worry at all about payday lending: • Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time. • Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan. • The choice to use payday loans is largely driven by unrealistic expectations and by desperation. • Payday loans do not eliminate overdraft risk, and for 27 percent of borrowers, they directly cause checking account overdrafts. • Forty-one percent of borrowers have needed a cash infusion to pay off a payday loan. By almost a 3-to-1 margin, borrowers themselves favored more regulation of payday loans, Pew reported. And so, it is no wonder that payday lending is a nearly perennial issue in legislative chambers across the United States. According to a 2009 report from the Better Business Bureau’s chapters in Missouri, hundreds of bills have been introduced in Congress and in states nationwide to limit or stop payday lending. “More and more states are clamping down on the payday loan industry with legislation that either bans payday lending entirely or provides stiff regulation of the industry,” the report said. Not easy to compare Saying that Minnesota fits somewhere in the middle of the regulatory spectrum is far from telling the whole story. Straightforward comparisons of Minnesota with other states are difficult. Under Minnesota law, payday loans are supposed to be limited to no more than $350 with a maximum fee of $26. But most payday lending works through a legal loophole allowing loan amounts up to $1,000 with fees that amount to annualized interest rates well over 200 percent. (More information is available at this installment of MinnPost’s Lending Trap series.) Meanwhile, other states have taken various approaches to regulating payday lenders, often with complex results. Thirty-eight states allow payday lending, for example, but in some of those states the practice is virtually impossible because of recently imposed usury limits.

Here is a closer look at the situation

States with in selected states: most restrictions on payday lending Missouri

Montana Arizona Arkansas Georgia North Carolina Pennsylvania West Virginia Maryland Washington, D.C. New Jersey New York Connecticut Massachusetts New Hampshire Vermont

Among states where payday loan rates are regulated, Missouri allows the highest APR. At 75 percent of the initial loan, a two-week payday loan can come with a 1,950 APR. But most lenders don’t charge the maximum. The average APR in the state in 2011 and 2012 was about 455 percent, or about $53 in interest and fees for an average $300 two-week loan, according to a 2013 Missouri Division of Finance report to the state’s governor. Even so, average interest rates in the state have risen steadily, from 408 percent in 2005 to the current 455 APR. Likewise, the average loan amount has increased from $241 to $306. The demand for larger loans is mirrored in other states, including Minnesota where the loan size increased from $316 in 2005 to $373 in 2011. At storefronts in Minnesota, customers can borrow up to $1,000, although many businesses won’t lend more than $500. But Minnesota’s rates tend to be lower than those charged in Missouri. Minnesota borrowers paid fees, interest and other charges that add up to the equivalent of average annual interest rates of 237 percent in 2011, according to data compiled from records at the Minnesota Department of Commerce. The highest effective rate in Minnesota was 1,368 percent, still lower than Missouri’s cap of 1,950 percent. While Missouri stands out, some of Minnesota’s nextdoor neighbors also are “permissive” states, according to Pew’s research. Wisconsin and South Dakota don’t cap the interest rate on payday loans. In Wisconsin lenders cannot give out more than $1,500, in South Dakota it’s limited to $500. The average APR on a Wisconsin payday loan in 2012 was 584 percent, according to the state’s Department of Financial Institutions, or about $90 on a $400, two-week loan. Another issue regulators consider is “rollover,” the practice of taking out a new loan to pay off fees and interest on a previous loan. The Pew researchers found that only 14 percent of payday borrowers can afford the more than $400 needed to pay off the full amount of a payday loan and fees. So many borrowers renew the loans rather than repaying them. Ultimately, nearly half need outside help to get on top of the loans, and they turn to the same options they could have used instead of the payday loan: seeking help from friends or family, selling or pawning personal possessions or finding a different type of loan. Missouri, like a few other states, allows borrowers to rollover up to six times. Minnesota and many other states ban rollovers but customers can take out the same loan as soon as the first is repaid. In 2011, nearly a quarter of Minnesota borrowers took out 15 or more payday loans, according to the state Department of Commerce. Delaware On New Year’s Day, a new law took effect in Delaware, limiting borrowers to five payday loans a year, including rollovers and regardless of lender.

Timeline of significant events in regulatory history of short-term loans 1916: To combat loan sharks, the Russell Sage Foundation publishes the Uniform Small Loan Law — a model law for state regulation of loans of up to $300 at 3.5 percent monthly interest. Two-thirds of states eventually adopt some form of this law, allowing Annualized Percentage Rages of 18 to 42 percent. 1939: Minnesota passes the Small Loan Act, based on a later draft of the Uniform Small Loan Law — which allows for loans up to $300 and 3 percent month interest. Early 1990s: State legislatures begin allowing deferred presentment transactions (loans made against a post-dated check) and triple-digit APRs — known today as payday loans. 1995: Minnesota passes the Consumer Small Loan Act, which allows short-term loans up to $350 and fees and interest equaling no more than about $26. 2001: North Carolina allows its payday lending law to expire, making payday loans illegal again after being allowed for four years. It is the first state to ban the loans after legalizing them. Early 2000s: Some Minnesota lenders begin operating as Industrial Loan and Thrifts, allowing them to grant larger loan and charge rates beyond the 1995 Consumer Small Loan Act. 2006: Congress passes the Military Lending Act of 2007, which prohibits giving out payday loans, vehicle title loans, and tax refund anticipation loans at an APR of more than 36 percent to military personnel and their families. It’s the only federal legislation on payday lending. 2008/2009: Legislation is introduced to further regulate Minnesota’s payday loan industry, including capping the APR at 36 percent. Despite support from consumer advocates, bills still make little progress in the face of strong opposition. 2013: Fifteen states do not allow payday loan stores or else set interest rate caps low enough to drive payday lenders from the state. 2013: Minnesota lenders operating as Industrial Thrift and Loans now dominate the market. The top three small-loan lenders in the state are licensed as Industrial Loan and Thrifts. Sources: Pew Charitable Trust, Minnesota Legislature, Center for Responsible Lending, “A regulatory small loan law solves loan shark problem” J.A.A. Burnquist, The Center for Responsible Lending

Advocates in Delaware had pushed for years to outlaw payday lending but failed. The new law represents a different approach, one that some other states are taking too: reducing rollovers but not eliminating high-interest, short-term lending. Delaware’s move started with unlikely collaborators. Delaware state Sen. Colin Bonini -- a Republican who said he is “as conservative and pro-business as you can get” -- teamed up with Delaware Community Investment Action Council, other nonprofits and Democratic state Rep. Coleen Keely, who wanted to ban the practice. Bonini said in a telephone interview with MinnPost that he had been personally affected by payday lending when a relative got caught up in a “debt trap.” While joining forces with advocates for outright bans, Bonini argued for a different approach. “Under no circumstances did we want to get rid of the loans, because they’re very important for people to have access to credit,” Bonini said. Instead, he stressed that the target should be the “debt cycle” -- perpetually taking out loans, one after the other. “So we hopefully created a system where people can still get access to a loan they need but won’t get caught up in seven or eight or nine of these,” he said. Before the bill, Delaware had relatively light restrictions on payday lending. Consumers could borrow up to $500 without an interest rate cap. The new law raised the loan cap to $1,000 but didn’t cap the interest rate, something Bonini said was not as great a worry as the number of loans per borrower. In Minnesota, similar bills to curb lending practices have regularly been introduced over the years. In 2009, state Sen. Kevin Dahle, DFL-Northfield, proposed allowing up to three payday loans in a six-month period, with a fourth loan being automatically paid back in installments. He said that the idea faced strong opposition and made little headway. Some Minnesota advocates for stricter regulation agree with Bonini that payday lending serves an otherwise unmet need for short-term credit. “At this point, given that the traditional finance system has not stepped up to fill the gap or offer comparable products on better terms, I don’t know that we outlaw it,” said state Rep. Jim Davnie, DFL-Minneapolis, who has been a leading proponent of tougher regulations in Minnesota. Montana

than $150,000 in campaign contributions in 2011 and 2010 combined. (For more information, see this installment of MinnPost’s Lending Trap series.) And just like Minnesota, Rush said Montana’s opposition was bipartisan. Although DFLers have tended to push regulation in Minnesota, they’ve faced strong pushback from within their own party as well as from Republicans. Lacking success in the Legislature, Montana’s advocates for stricter regulation turned to the public. A few public opinion polls had indicated there was support for an interest rate cap, Rush said. Although Montana’s new policy is not an outright ban, Rush said payday lenders have shut their doors since the initiative passed. Nationwide, payday lending supporters and opponents agree a 36 percent cap effectively bans payday loans. But Rush said she hasn’t heard much outcry for short-term cash. Montana has a strong libertarian streak. It is one of a few states without a sales tax. But Rush attributed the APR cap to citizens being “conscious of corruption.” Moving forward As states evaluate payday lending regulations, a relatively new federal agency also is looking into the shortterm credit market. In mid-February an advisory board to the Consumer Financial Protection Bureau urged the board to consider rule changes. “There is an obvious demand for short-term credit products, which can be helpful for consumers who use them responsibly and which are structured to facilitate repayment,” Richard Cordroy, the bureau’s director, said in a statement. “We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances.” “Debt traps should not be part of their financial futures,” he said. In Minnesota, Dahle, the DFL senator from Northfield, said he plans to revisit the issue. He said he has support from religious groups as well as from some fellow legislators. In keeping with their missions to serve the needy, many faithbased groups have become advocates for disadvantaged borrowers. Dahle said he’ll look over the issue after the current session ends and formally bring it up again in 2014. “There’s a lot of allies with me on this,” he said.

In Montana, nearly 72 percent of voters in 2010 approved a ballot initiative to cap interest rates in the state at 36 percent APR. Several earlier attempts to regulate the lending had been thwarted in the state Legislature, said Nicole Rush, communications director for the Montana Community Foundation, which worked with a statewide coalition on the ballot initiative. “We just faced too much opposition from industry lobbyists,” she said. Industry lobbyists in Minnesota have similarly opposed any changes to the state’s laws. Brad Rixmann, owner and CEO of Payday America, the largest payday lender in Minnesota, gave more

Screen grab of interactive graphic on website.

‘Dual tracking’ trap: Owners lose homes while trying to modify mortgages Published March 21, 2013

By Sharon Schmickle and Sarah Rose Miller This article was produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. Rose McGee’s first encounter with the issue called “dual-tracking” came on June 4, 2012, when she called CitiMortgage Inc. to inquire about her bid for a modification of her mortgage. She was shocked by the answer: Her Golden Valley home of nearly 20 years had been sold in a sheriff’s sale on May 18 that year. “Is this a joke?” McGee recalls asking. It was no joke. Even while the bank agreed to consider modifying McGee’s mortgage and worked her through the necessary paperwork, it had been moving to foreclose on her home. And now CitiMortgage and Federal National Mortgage Association (Fannie Mae) have gone to court to evict her. Like McGee, many other homeowners in Minnesota and across the nation have trusted in the lifeline offered by mortgage modification only to learn that lenders were nonetheless positioning themselves to take the property. Now, in response to protests over cases like McGee’s, the state and federal governments are considering bans on dualtracking. Bills before the Minnesota Legislature would outlaw the practice in the state. California already has banned it. And federal mortgage servicing rules scheduled to take effect in January 2014 would restrict it. Meanwhile, a National Mortgage Settlement between the nation’s five largest mortgage servicers, 49 state attorneys general and the federal government was supposed to end dual-track foreclosures for many loans. The case initially was prompted by blatant robo-signing of foreclosure documents without checking their accuracy. Citi was one of the lenders in the settlement announced in February, 2012, along with Ally/ GMAC, Bank of America, JPMorgan Chase and Wells Fargo. Opposition The momentum to curb dual-tracking should not be taken to signal a consensus against it. Arguments aplenty surfaced during a hearing of the proposed Minnesota ban at a Feb. 27 meeting of the House Committee on Civil Law. The bill being debated would go beyond the dual-tracking ban to also require mandatory mediation before a foreclosure and more notification during foreclosure proceedings. The net effect would be to make lending more risky and expensive in Minnesota -- and, ultimately, the added burden would fall on prospective borrowers, Tess Rice, General Counsel for the Minnesota Bankers Association testified. “I do think that lending will be reduced everywhere . . . if it is more difficult to foreclose,” she said.

MinnPost photo by Sharon Schmickle

In January 2012, Citi moved to foreclosure and scheduled a sheriff’s sale of Rose McGee’s house.

Minnesota borrowers still would get loans, Rice testified, but “the standards will be higher and it will cost more.” If that were true, Californians should be having trouble getting mortgages right now because their ban took effect Jan. 1, said the Minnesota bill’s chief House author, Rep. Mike Freiberg, DFL-Golden Valley. But the mortgage market remains robust in California, he said, and Minnesota’s proposed legislation is fashioned after California’s law. “The mortgage market in California is doing just fine,” Freiberg said in an interview. California passed its dual-tracking ban last summer as part of its Homeowner Bill of Rights. Some have credited it with significantly reducing California’s foreclosure rate. For the first time since 2007, California was not the state with the most foreclosure filings per property in January, according to foreclosure listing firm RealtyTrac’s January report. Foreclosure starts in California in January had dropped 62 percent from December. Phone calls every week Critics of the Minnesota legislation also have argued that dual-tracking is increasingly rare. But Michael Wang, a Minneapolis attorney representing McGee and other homeowners battling foreclosure, said he has multiple clients that are “great examples” of the problem. “The financial institutions are trying to claim that dual-tracking doesn’t occur, but I get phone calls about it every week,” he said.

McGee’s problems began compounding long before Wang took her case last year. They started with the death of her husband when he was just 47 years old. William McGee had been the first AfricanAmerican to be appointed Chief Public Defender in Minnesota, according to a tribute posted on a website of the University of Minnesota Law School. After he died in 2000, Rose McGee planned to sell their home overlooking a pond in a leafy suburban neighborhood. But in the economic slump that followed the Sept. 11, 2001, terrorist attacks, homes in her neighborhood weren’t selling. So she stayed. But keeping up with the mortgage payments was a struggle. A break came when the Obama administration created the Home Affordable Modification Program in 2009. Under that program, McGee’s interest rate was reduced and, as a result, her payments dropped too. “Finally, I had an affordable mortgage,” she said. Not for long, though. In 2011, she lost her job. At age 60, she was hunting for work in the MinnPost photo by Sharon Schmickle toughest job market Minnesota Rose McGee had seen in decades. Expecting to miss payments, McGee said, she contacted CitiMortgage to explain the situation and discuss her options. Nothing could be done until she was truly behind on payments for a few months, she learned. In January 2012, Citi moved to foreclose and scheduled a sheriff’s sale of the house. By that time, McGee had a lead on a promising new job, so she contacted the bank again and asked whether mortgage modification was possible. Citi agreed to consider her request, and she got busy lining up the required paperwork. She was told, she said, not to worry about foreclosure-related notifications that would come routinely. McGee said she called Citi on May 24 and was told that her modification had been denied. Then, when she called again on June 4 to ask about other options, she learned that the home already had been sold. CitiMortgage had bought it in the May 18 sheriff’s sale and, in turn, sold its interests to Fannie Mae. “It was strictly business, and I understand that, but it is painful nonetheless,” McGee said. “The government was taking care of the banks, and yet here we are -- people like me.” Some people might have given up at that point. Not McGee. She had longstanding connections in the Twin Cities. Beyond her work for community organizations, she was wellknown as a professional storyteller, writer, actor and prolific baker of sweet-potato pies. Organizations rallied to McGee’s cause, including Northside Community Reinvestment Coalition, Jewish Community Action and OccupyHomesMN. Local politicians joined the strategy sessions around her dining room table. She also enlisted the Minnesota attorney general, congressional offices and national advocates for homeowners facing

foreclosure. After two eviction hearings, McGee still is in her house but living in a state of limbo. She is suing in Hennepin County District Court to invalidate the foreclosure sale. Meanwhile, her attorney, Wang, has asked the Housing Court to put her eviction on hold. CitiMortgage did not respond to MinnPost’s request for comment on her case and on the broader issue of dual-tracking. Unanswered phone calls, lost paperwork Restricting or banning dual-tracking would not necessarily stop foreclosure for McGee and others who fail to make their scheduled mortgage payments. Indeed, foreclosure may be the fairest all-around option in many cases. The point is to make sure that meaningful alternatives to foreclosure truly are considered, given the chaos that has characterized the mortgage marketplace in recent years. As millions of borrowers fell behind on their loans, the companies that service those loans were swamped with delinquencies. And some took shortcuts that riled regulators and lawmakers. “People did not get the help or support they needed, such as timely and accurate information about their options for saving their homes,” Richard Cordray, director of the U.S. Consumer Financial Protection Bureau, said in January in remarks prepared for a mortgage servicing field hearing. “Servicers failed to answer phone calls, routinely lost paperwork and mishandled accounts,” Cordray said. “Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold. At times, people arrived home to find they had been unexpectedly locked out.” In McGee’s case, attorneys for CitiMortgage notified her more than two months after her home had been sold that she had been given the wrong phone number to call for help with mitigating her loss. Minnesota law requires the foreclosing company to provide a document called “Help for Homeowners in Foreclosure” at least four weeks before the sheriff’s sale. The form sent to McGee listed the number of a facsimile machine “answered by high-pitched tones and beats,” according to a complaint filed in her case. New federal rules If the new rules issued by the U.S. Consumer Financial Protection Bureau take effect next January, mortgage servicers will not be allowed to issue the first foreclosure notice until an account is more than 120 days delinquent, giving borrowers reasonable time to seek modification. Further, servicers will not be allowed to start a foreclosure proceeding if a modification application is pending. The foreclosure process would start only after a borrower rejected a mitigation offer, failed to comply with the terms of such an offer or received notice that he/she is not eligible for any alternative options. And foreclosure would have to wait until any appeal had been settled. What about a case like McGee’s, where the foreclosure process already had started before her modification application? If she completed her application 37 days before the scheduled foreclosure sale, the new rules still would apply. In other words, Citi could not have proceeded with the

sale of her home until she was notified that her request for modification was denied and she had exhausted her options to appeal that decision. State rules needed? At a hearing of Minnesota’s proposed ban, David Skilbred, vice president of the Independent Community Bankers of Minnesota, testified that the new federal restrictions have resolved any dual-tracking concerns. If Minnesota were to pass a different law, he said, “that would cause a problem...especially with the small banks.” Rice, of the Minnesota Bankers Association, said: “Small lenders are already planning their exit from the mortgage market due to the complexity of the federal rules. …. We believe adding a second layer of state regulation will only exacerbate the situation.” The Consumer Bureau has said that small mortgage servers who handle 5,000 mortgages or less would be exempt from some of the rules. Freiberg, author of the Minnesota bill, cited several reasons the state should proceed with its own ban. One is that state law could take effect many months before the federal government implements its rules. Another reason is that the U.S. Consumer Financial Protection Bureau is operating under a legal cloud. After Republicans in Congress blocked President Obama’s choice for its director, Obama appointed Cordray while Congress was in recess. Recently, a federal appeals court ruled that another one of Obama’s so-called recess appointments was unconstitutional. Meanwhile, congressional Republicans have insisted that Cordray must be replaced by a bipartisan oversight commission, and they have threatened to pull funding from the agency.

MinnPost photo by Sharon Schmickle

Attorneys for CitiMortgage notified McGee more than two months after her home had been sold that she had been given the wrong number to call for help with mitigating her loss.

Yet another reason, Freiberg said, is that the state bill offers more effective enforcement mechanisms than the federal rules. ‘Wears terribly on you’ Meanwhile, McGee has posted a sign on her front lawn saying “Stand Together Stop Foreclosures.” Her fate rests on the outcome of her two court cases, she said, not on the bills before the Minnesota Legislature. Still, she has been a prominent advocate for the bills, testifying at hearings and appearing at press conferences staged by the DFL authors. She hopes to spare others from dual-tracking. “It’s frustrating,” McGee said. “It wears terribly on you.”

As state ages, Minnesota braces for problems with risky reverse-mortgage Published April 5, 2013

By Kevin Burbach and Sharon Schmickle This article was produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. George Vognar trusted the promise of reverse mortgages: They would allow senior citizens to stay in their homes while also living on part of the equity. Only after Vognar locked into the mortgage on his St. Paul home, did he learn that the bank wouldn’t include his wife, Christine Midelfort, in the deal when she reached the eligible age of 62. Now, if George dies before her, she stands to lose the English-cottage style house where they have lived since 1989 and reared two daughters. “We trusted people,” he said. “That was our problem with the reverse mortgage.” Vognar turned to the state Attorney General’s office where at least 100 Minnesotans have complained since 2008

MinnPost photo by Sharon Schmickle

Only after George Vognar, left, looked into the mortgage on his St. Paul home, did he learn that the bank wouldn’t include his wife, Christine Midelfort, right, in the deal when she reached the eligible age of 62.

about misrepresentations, aggressive marketing and excessive fees connected with these mortgages. Some senior citizens said they were pressured into mortgaging their homes in order to buy gold coins, annuities and other questionable investments. Some said they were double billed for government-required counseling and then hounded to pay the excess charges. Collectively, the complaints outline a problem that is poised to grow dramatically as some 32 million home-owning Baby Boomers seek means to stretch their retirement dollars. Anticipating the impending problem, the Minnesota Legislature passed a bill in 2009 that would have imposed stricter rules on reverse mortgage lenders. Then Gov. Tim Pawlenty vetoed it.

into reverse mortgages. He was getting ready to retire from his work as a psychotherapist. Midelfort planned to continue her part-time work teaching Norwegian language and translating. With Social Security and savings added to her income, they could cover expenses, but it would be tight. Retired life would be much easier if they could erase their mortgage payments of some $14,000 a year. Hoping their ticket to that easier life could be a reverse mortgage, they worked the numbers and realized they were sitting on enough equity to cover the mortgage payments. But there was a catch. At age 58, Midelfort was too young to qualify for the mortgage. The deal would have to be done in Vognar’s name alone, they were told at the offices of Wells Fargo Home Mortgage. In other words, her name would come off the title.

Too many gone bad Reverse mortgages enable some seniors to live out a more comfortable retirement. But too many of these deals have gone bad, with seniors in foreclosure and their loved ones homeless. And too many shady dealers have turned loans that were intended to help seniors into instruments for preying on them instead. “We are now seeing some of the same brokers whose activity resulted in the subprime mortgage lending fiasco start to sell reverse mortgages as a way to make up for the meltdown in the regular housing market,” Attorney General Lori Swanson said in a letter to Vognar. In a regular mortgage, you borrow money to buy a home, and you immediately begin to pay the loan back through regular payments to the lender. A reverse mortgage is different. Essentially, you convert the equity in your home into cash without having to meet any income qualifications or even prove you are credit-worthy. You can take the equity as a lump sum, an income stream or a line of credit to help pay major expenses. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The loan balance eventually can grow to exceed the value of the home, particularly during times of declining home market values. But the borrower is not required to make up that difference. Borrowers do not necessarily live payment-free, however. They still are responsible for property taxes and insurance on the home. Further, when a borrower dies or moves away – say, into a nursing home for an extended time -his or her heirs must repay the mortgage or forfeit the home. The allure is obvious, and it is easy to see why this type of lending has grown nationwide into a $20 billion industry involving more than 740,000 mortgages. The catch The rub for Vognar and for many other couples came with the fact that borrowers must be at least 62 years old to qualify for a federally insured reverse mortgage. Vognar was 71 back in 2008 when he started looking

‘I was really scared’ Midelfort said she balked. “I asked over and over again, ‘Why do I have to take my name off [the title], and how can I get it back on there?’,” she said. “I was really scared.” Here’s what happened next, according to a complaint Vognar filed with the Minnesota Department of Commerce and the Minnesota Attorney General’s office: The couple was referred to a reverse mortgage specialist at a Wells Fargo office in Coon Rapids. “We met with this woman and discussed our concerns for over an hour,” Vognar said in the complaint. “She assured us repeatedly that my wife could be put on the mortgage when she reached the age of 62.” That didn’t prove to be the case. In written responses to inquiries from Vogner and Attorney General Swanson, Wells Fargo Home Mortgage specialists in Des Moines said, “please be advised, WFHM is unable to confirm or deny conversations that occurred at the time of origination.” In another letter, Wells Fargo told Vogner: “In order to add a borrower to an existing loan, you would be required to refinance the loan. However, effective June 30, 2011, Wells Fargo Bank, N.S. discontinued accepting new applications for reverse mortgage loans.” The couple could start from scratch by seeking a new lender from the National Reverse Mortgage Lenders Association, Wells Fargo said. But that’s not a real option, Midelfort said. The recent downward spiral in home values coupled with closing costs and the accumulated interest on the original reverse mortgage left them with no equity to bring to the reverse mortgage market. In other words, Midelfort stands to lose her home if her husband dies before her or goes into a nursing home or assisted living center for longer than a year. Regulatory struggles

In 2009, the Minnesota Legislature moved to tighten

rules for reverse mortgages with a bill that was intended to protect senior citizens who had been made especially vulnerable during the unfolding economic crisis, said Rep. Jim Davnie, DFL-Minneapolis, chief author of the House version of the bill. Reverse mortgages from private lenders “are being aggressively marketed, are increasingly complex, sold as investment vehicles, and coupled with a growing demand from Wall Street for these products for the securitization market,” Davnie said at a hearing on the bill. The bill would have extended regulations on federally insured reverse mortgages to all reverse mortgages in Minnesota, Assistant Attorney General Carla Heyl said at the hearing. It also would have extended the time during which a senior could back out of a deal, further limited cross-selling of items like annuities and stepped up counseling to inform borrowers of other options for meeting their needs. The bill drew support from senior citizen and consumer groups, including the local AARP chapter. AARP supports reverse mortgages, which deplete a home’s equity, only as a last resort, Alexander said.

It’s helped them pay medical bills, or prescriptions. . . . I can’t tell you how many people we pull out of foreclosure with our reverse mortgage.” The bill was amended to address concerns from the mortgage industry, and it passed the House and Senate by wide margins. But then-Gov. Pawlenty vetoed it. Focus shifted to foreclosures

Opposition and veto But the bill also drew strong opposition at the hearing. “We’re worried that, as drafted, [certain] provisions may make it difficult if not impossible to actually sell these reverse mortgages,” said Matthew Lemke, testifying on behalf of the Mortgage Bankers Association. Beth Paterson, who said she had 10 years of experience providing seniors with reverse mortgages, echoed that concern. She had worked as an executive for reverse-mortgage companies and also written books advising consumers about the product. “Reverse mortgages have made a huge difference in my clients’ lives,” Paterson said. “It’s allowed them to retire. . . .

Since then, legislators who are interested in mortgage problems have focused on the flood of foreclosures that hit their districts during the Great Recession. “I’m so involved with foreclosures because my district is one of the hardest hit in the country,” said Rep. Joe Mullery, a DFLer who has introduced several mortgage-related bills this session in a bid to stabilize his North Minneapolis district. Mullery said he’s considering reverse-mortgage legislation that would not reflect the 2009 bill but instead would guard Minnesota seniors against a problem that has surfaced in other states. The problem, Mullery said, is that creditors who have won court judgments against some reversemortgage holders have been able to seize the income from the mortgages. “Let’s say I’m 70 and I have very little income so I do a reverse mortgage under which the bank pays me so much a month,” he said. “Now, let’s say I’m driving down the road, an accident happens and I don’t have enough insurance to cover all of the damages . . . so they get a judgment against me.” As the law stands now, the holder of the judgment could take the monthly payments on the reverse mortgage even though the home could not have been seized had there been no reverse mortgage, Mullery said. “So I’ve given up the equity in my home and now I can’t get the monthly payments I need to live on,” he said.

Younger and deeper in debt There is no question that reverse mortgages could help certain retirees live more comfortably by tapping their equity. Half of American homeowners age 62 and older held more than 55 percent of their net worth in home equity in 2009, according to a report published last year by the U.S. Consumer Financial Protection Bureau. Recently, retirees have been turning to reverse mortgages at substantially younger ages than in the past. They are struggling with more debt, and they are more likely to take the reverse mortgage as a lump sum rather than an income stream. While most seniors find other ways to stretch retirement dollars, the minority who do turn to reverse mortgages should do so with caution, the Bureau’s report stressed. Among other findings, it said: • Reverse mortgages are complex products and difficult for consumers to understand because of their “rising balance, falling equity” nature. And the tools available to help consumers understand prices and risks are “insufficient to ensure that consumers are making good tradeoffs and decisions.” • The fact that seniors are tapping home equity at younger ages and taking the money up-front at closing sets up a risk that those borrowers will find themselves without the money to pay expenses later in life. They also are at greater risk of falling behind on taxes and/or insurance which sets them up for foreclosure. Last year, 9.4 percent of the borrowers were at risk of foreclosure even with the benefit of their reverse mortgages. They also were prime targets or fraud and financial scams. • Misleading advertising remains a problem. And counseling designed to help consumers understand the risks associated with reverse mortgages needs improvement. Among other concerns, some counseling agencies only receive payment if and when the reverse mortgage is closed, which calls into question the counselors’ impartiality. A bit of a bulldog Like Vognar and Midelfort, couples often aren’t aware that the younger spouse may lose the home because he or she was not old enough to be listed as co-borrowers at the time of closing, the report said. “If the borrowing spouse dies or needs to move, the non-borrowing spouse must sell the home or otherwise pay off the reverse mortgage at that time,” it said. In fact, there have been cases in which other family members such as children and grandchildren also were left homeless. For Vognar and Midelfort, the house they mortgaged was more than a beloved home. It also was part of her longterm retirement strategy. Should he die first, they had planned, she could boost her income by renting out a small apartment that is built into the house. Now, she stands to lose that security too. They haven’t given up their plan, though. On the advice of the Attorney General’s office, Vognar has asked a legal aid service for veterans to help him line up a private attorney. “He is a bit of a bulldog, so he is going to stick with this,” Midelfort said. “We don’t know if there is anything we can do about it, but we sure will find out.”

Minnesota’s attorney general offers these tips for families considering reverse mortgages. • Consider your options. Look into taking out a traditional home-equity loan or line of credit – especially if you only need to borrow a small amount of money for a short period of time. • Watch for high up-front costs. Reverse mortgages are not cheap. Make sure you understand all fees and costs. Don’t think that you aren’t paying high costs just because these expenses are paid out of the loan proceeds. • Understand the product. Because you are deferring repayment of the reverse mortgage until you move out of your home or die, the amount you owe will grow substantially over time. There may be little or no home equity left for you to pay long-term care expenses if you sell your house. • Beware of sales gimmicks. Be extremely cautious if anyone tries to sell you something -- be it a new roof or another financial product like an annuity or long-term care insurance -- and suggests that you pay for it with a reverse mortgage. The cost of the loan is usually more than you could earn on any prudent investment. • Beware of fear tactics. Be skeptical of agents who use fear of going into a nursing home or running out of money to sell you a reverse mortgage. Beware of lenders who tell you that the government has somehow endorsed the sale of reverse mortgages. Beware, too, of “educational seminars” about reverse mortgages where the real purpose is not to “educate,” but to sell a reverse mortgage. • Beware of people who charge you to help you find a mortgage. They do for a fee what you can do on your own for little or nothing. • Get legitimate help. The law requires you to undergo counseling before anyone sells you a reverse mortgage. Some counseling is just over the telephone and may be by someone who is paid by the lender. Because a reverse mortgage is a complicated product, you should consult an independent attorney or trusted adviser before you enter into the transaction. • Slow down. Remember, as in all consumer transactions, if it sounds too good to be true -- it probably is.

Minorities in Twin Cities more likely to pay more for mortgages Published April 24, 2013

By Sarah Rose Miller and Samantha Labrasca This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. When a St. Paul homeowner introduced herself at a community foreclosure meeting, she did not mince words. “I’m Sheronda Orridge, and I’m a sharecropper at 525 Sherburne,” she told the 350 community members in 2011. That’s what it felt like to her, she said, paying her mortgage bills and yet seeing that her loan balance was not shrinking. Orridge was one of many Minnesotans of color who were dealt subprime or otherwise predatory home loans at higher rates than most white Minnesotans paid in the years leading up to the Great Recession. Banks profited by pushing African American and Hispanic families into such highcost mortgages. Then, when the housing bubble burst, those borrowers lost their homes at disproportionately high rates. Around the Twin Cities, many still are fighting foreclosure. Now, from Orridge’s Frogtown neighborhood to highlevel offices in the Obama administration, a battle is underway to end such discriminatory lending.

MinnPost photo by Sarah Rose Miller

Sheronda Orridge sits in front of the home she nearly lost in her St. Paul neighborhood. Frogtown residents were particularly hard hit during the economic crisis, and many lost their homes to foreclosure.

Justice Department crackdown

Different rates One of the ironies of lending in the United States is that those who are least able to pay are likely to be charged the most. Banks try to protect themselves against losses by charging higher rates for higher-risk clients. That’s not the whole story, though. While the higher rate of poverty among minorities partially explains the correlation between race and high-cost lending, numerous reports and studies over the years have shown that, even while controlling for income, minorities in the Twin Cities have been more likely to pay more for mortgages: • The Twin Cities metro area ranked second in the nation for the most significant racial disparities in the distribution of subprime loans, according a 2008 report by the National Community Reinvestment Coalition. The disparities were greatest between higher income minorities and higher income whites, the study said. • Regardless of income, African Americans, Hispanics and Asians in the Twin Cities were at least twice as likely as whites to receive subprime mortgages, according to a 2007 study by the Center for Urban and Regional Affairs. • High-income minorities in the Twin Cities were more likely to get a subprime loan than were even low income whites, according to a 2009 report by the Institute on Metropolitan Opportunity. The disparities were starkest between blacks and whites.

Allegations of systematic discrimination led the U.S. Justice Department’s Civil Rights Division to sue Wells Fargo, the nation’s largest home-mortgage lender. Federal authorities alleged that between 2004 and 2009 Wells Fargo, working through independent brokers, charged higher rates and fees to more than 30,000 African American and Hispanic borrowers than to their white counterparts with the same credit risk. Wells Fargo settled the case last July, pledging to pay $175 million but denying the allegations. In a statement announcing the settlement, Wells Fargo said it would stop dealing through independent brokers. Other major lenders also have faced recent federal lawsuits over alleged discrimination. Owners of Countrywide Financial Corporation agreed to pay $335 million in compensation to some 200,000 creditworthy African American and Hispanic borrowers nationwide who had paid excessive fees and interest rates. Dallas-based PrimeLending and Virginiabased C&F Mortgage Corp. also agreed, without admitting wrongdoing, to compensate black and Hispanic borrowers for higher prices they had paid. The Twin Cities was not singled out in those nationwide cases. But lenders here have engaged in the same type of discrimination, said Myron Orfield, who analyzes the mortgage market as director of the University of Minnesota’s Institute on Metropolitan Opportunity. “It’s worse in Minneapolis,” Orfield said. “We have the biggest disparities in lending between black and white.” While Wells Fargo is Minnesota’s leading mortgage lender, the Twin Cities was not one of the eight metropolitan areas investigated by the Justice Department. Wells Fargo’s Minnesota spokeswoman, Peggy Gunn, responded to questions about the case via email: “We do

Graphic by Institute on Metropolitan Opportunity

Income is not the only factor that determines a borrowers risk, but dramatic racial disparities shown in this chart suggest that race does influence loan terms. Due in part to lending patterns such as these, minority borrowers across the Twin Cities lost their homes at disproportionately high rates when the housing bubble burst.

not tolerate discrimination against, or unfair treatment of, any consumer. Our loan decisions are based on credit and transaction risk. Race is not a factor.” As part of the settlement, Wells Fargo also conducted an internal review of subprime loans made to African Americans and Hispanics through the bank’s own agents and identified an additional 3,990 borrowers “who might have qualified for prime loans,” Gunn said. A settlement administrator is expected to begin compensating borrowers later this year, she said. Devastating consequences Meanwhile, as the nation’s attention turns to other issues, the pain continues for borrowers, and radiates through their families and communities. High-cost mortgages often force borrowers to spend more just to keep up with the interest rates and leave them less able to cover basic living expenses and contribute to the greater economy. “The effects of the crisis are nowhere near over,” said Tom Goldstein, a lawyer who worked with the St. Paul Fair Lending Coalition. The crisis persisted for years at the home where Orridge has lived since 1997. She ran A Mother’s Touch Daycare out of her basement. In 2005, with an eye toward buying a building and relocating her daycare, Orridge decided to refinance.

Loan officers at World Savings Bank encouraged her to refinance with a “pick-a-payment” loan, which would offer her four repayment options, she said. Under the minimum payment plan, she was told, she could pay less than $500 a month on her $132,000 loan for the first year. What was not clear to her, though, was that this would eventually drive her deeper into the hole because her loan payments did not cover the full interest accrued. At that time, the average starting interest rate for a one-year adjustable-rate mortgage would have been about 4.5 percent. Orridge’s starting interest rate was 6.5 percent. Her credit score at the time was in the 700s, she said, which was close to the national average. Orridge decided to take the lowest payment option, thinking she would refinance before the payments, which were set to double over the life of the loan, became too high to handle. What she hadn’t counted on was that the value of her home, like others nationwide, would plummet. Unable to refinance, Orridge was stuck with payments that were increasing for a house that was losing value. “At this point, I’m just paying just to stay in my house; I’m not paying on anything else,” she said. Orridge’s problem was not unique. She was automatically entered as an unnamed plaintiff in a class action lawsuit against Wachovia, which had acquired World Savings, alleging deceptive marketing of “pick-apayment” loans.

Sarah Rose Miller

Data from the 2011 American Housing Survey conducted by the U. S. Census Bureau shows that black homeowners are still saddled with higher interest rates to a significantly greater degree that non-black homeowners.

Customers who were offered the low monthly payments were not clearly told that these payments would fail to even keep up with the costs of their interest rates, which would be added to the principal amount of the mortgage and accrue more interest in a process known as negative amortization, according to the lawsuit. Wachovia denied the allegations, but settled to avoid protracted litigation, according to the court documents. When the settlement came through in 2011, Orridge received a check for less than $200. ‘Prove it to me’ While a number of factors, including poverty, neighborhood segregation and language and cultural barriers, all contribute to the disparate rates of subprime lending between whites and minorities, sometimes the reason is as simple as discrimination. Even when minorities in higher socioeconomic brackets applied for loans to prime lenders, they were much more likely to be denied, according to the report by the Institute on Metropolitan Opportunity. “It seems unreasonable that a black household that earns $157,000 a year is systematically less credit worthy than a white household that earns $40,000,” said Orfield, author of the 2009 report. “Prove it to me, is what I say. Show me. I don’t believe that.” Tess Rice, general counsel at the Minnesota Bankers Association, cautioned against making comparisons based only on race and income. The two most important factors in determining an individual’s interest rate are credit score and debt-to-income ratio, Rice said. “You could make $150,000 but have enough debt that that’s not sufficient income to cover a new loan,” Rice said. Though race and lending data that takes into account credit scores is hard to come by, there is anecdotal evidence. “We’re finding people with equal [credit] scores and

equal credit history -- some are going mainstream . . . and people of color are more apt to get mapped to the subprime,” said Nicholas Jaeger, the director of the Wealth Accumulation Intersection at the Minneapolis Urban League. In 2008, 40 years after the Fair Housing Act made it illegal to discriminate in housing against someone on the basis of race, color or country of origin, a coalition of civil rights and fair housing groups came together to assess the state of fair housing. The report by the National Commission on Fair Housing and Equal Opportunity concluded that despite strong legislation, discrimination in lending and housing markets continues “to produce extreme levels of residential segregation that result in significant disparities between minority and nonminority households, in access to good jobs, quality education, homeownership attainment and asset accumulation.” The U.S. Department of Housing and Urban Development (HUD) has repeatedly studied discrimination in housing and repeatedly found evidence of multiple forms of racial discrimination in mortgage lending. One recent HUD report, “Risk or Race,” studied the connection between minorities and subprime loans and concluded that “the inclusion of neighborhood credit measures did not explain away the troubling finding that race and ethnicity remain an important determinant of the allocation of mortgage credit.” Personal and economic repercussions With family income unsteady, Kathryne and Miguel Chiqui of Minneapolis were forced to dip into their savings in order to meet payments on the double mortgage for the duplex that Miguel and his brother, natives of Ecuador, had purchased in 2005. The Chiquis depleted their entire $20,000 savings in little more than a year, and eventually had to sell the house at a loss to avoid foreclosure. “It just made my stomach drop,” Kathryne Chiqui said. “I mean there were times when I just wanted to cry because it’s

Looking to the future

like watching your dream going down the drain.” The loss of equity potentially reaches far beyond the Chiqui family to their community and ultimately the state’s economy. Minnesota’s population is 87 percent white, making it less diverse than most other states. But the state’s minority communities are growing at a much faster rate than the white population, according to the U.S. Census. To leave a good share of Minnesota’s minority residents lost in a veritable credit desert is to weaken the economic future for the state as a whole. “It’s not only one family that’s affected by this. There are secondary casualties,” said Pablo Tapia of La Asemblea de Derechos Civiles, a statewide community organizing group for Latino immigrants. Discriminatory lending, said Tapia, “promotes homelessness and destroys the neighborhoods.... This is less money for the cities that are being impacted by it because there are no taxes coming from property taxes.” Further, properties near foreclosures also lose value, according to a report by the Center for Responsible Lending. This so-called spillover effect, based on foreclosures between 2007 and 2011, was a loss in value of $1.95 trillion nationwide. More than one-half of that was in minority neighborhoods, the report said.

After three years of trying to negotiate a modification to her loan, Orridge finally succeeded. Wells Fargo, which took ownership of her loan when it acquired Wachovia in 2008, gave her a modification in accordance with the government Home Affordable Modification Program. Her new loan has a current interest rate of 2.66 percent. After six years, the rate is set to rise to 3.78 percent for the duration of the loan. On top of that, Wells Fargo agreed to forgive $44,000 of the loan principal over a period of four years. Orridge can count herself among the lucky few. “The number of people that get in that situation… who actually get a modification that enables that to stay in their property, I’ll bet it’s not one in 10. I’ll bet it’s one in 20,” said Goldstein, the fair-housing lawyer. He helped Orridge negotiate with Wells Fargo. In May, Orridge launched a series of workshops in which others affected by foreclosure learned how to express their situations through performance art. The workshops were hosted by Arts Responding to Foreclosure, an organization Orridge helped found. “I’m still fighting,” Orridge said. “Even though I got my modification...as the song said, if one of us is chained, none of us are free.” Christopher Heskett and Kelsey Shirriff contributed to this article.

Federal regulators poised to crackdown on payday loans Published April 24, 2013

By Sharon Schmickle When banks allow customers to borrow against upcoming deposits – of, say, Social Security checks or paychecks – the transactions are advertised as safety nets and protection against overdraft fees when emergencies arise. In reality though, too many borrowers become trapped in a costly cycle of debt that can lead to more overdraft fees and other expenses, says a “white paper” issued this week by the U.S. Consumer Financial Protection Bureau. “They continually re-borrow and incur significant expense to repeatedly carry this debt from pay period to pay period,” says the white paper. Whether the borrowing is done from a storefront payday loan company or a deposit advance at a big bank, “The high cost of the loan or advance may itself contribute to the chronic difficulty such consumers face in retiring the debt,” it said. Now, federal regulators are poised to crackdown on the big banks, including U.S. Bank and Wells Fargo, offering loans

tied to checking accounts, according to the New York Times. “Regulators from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are expected to clamp down on the loans, which carry interest rates that can soar above 300 percent, by the end of the week,” the Times reported, attributing the information to “several people briefed on the matter.” Banks urged to stop loans In February, MinnPost reported in its Lending Trap series that several consumer advocacy groups in Minnesota had joined 250 organizations nationwide in a letter to federal regulators, urging them to stop banks from making such loans. The Minnesota groups included Lutheran Social Service of Minnesota, Minnesota Community Action Partnership, St. Paul-based Jewish Community Action, several

law firms and other organizations that work on behalf of immigrants, minorities and low-income families. “At face value, the loans provide quick assistance to households who are struggling to make ends meet,” said Pam Johnson, who directs research for St. Paul-based Minnesota Community Action Partnership. “But through our work and personal relationships with thousands of low-income Minnesotans, we know that household situation 30 days after the payday loan has not changed, and they will be unable to pay the loan on time,” Johnson told MinnPost in February. “This often results in an ongoing cycle of debt at extremely high interest rates that pushes families into desperate situations including foreclosure, bankruptcy and homelessness.” In a nutshell, these loans allow regular bank customers to borrow, typically up to $600, on their next scheduled direct deposits. The bank automatically repays itself and also collects a fee once the deposit arrives in the account. Stringent requirements Now, regulators are expected to impose more stringent requirements on such loans, the Times reported. “Before making a loan, for example, banks will have to assess a consumer’s ability to repay the money,” it said. “Banking authorities are also expected to institute a mandatory cooling-off period of 30 days between loans — a reform intended to halt what consumer advocates call a debt spiral of borrowers taking out fresh loans to cover their outstanding debt. As part of that, banks will not be able to extend a new loan until a borrower has paid off any previous ones.” Another requirement will address marketing, the Times said. “Because the advances are not typically described as loans, the interest rates are largely opaque to borrowers,” the newspaper said. “Wells Fargo, for example, charges $1.50 for every $20 borrowed. While the bank’s Web site warns that the products are “expensive,” there is no calculation of an interest rate. The banking regulators will require that banks disclose the interest rates, according to the people familiar with the

guidance.” In response to MinnPost’s questions in February, the banks defended their products. They insisted that their loans come with safeguards intended to avoid the pitfalls of storefront-style payday lending in which borrowers sometimes sink into unmanageable debt by seeking new loans to meet payments on old obligations. “Checking Account Advance is a safety net for our customers who have experienced an unexpected expense such as a medical emergency or an auto repair,” Nicole GarrisonSprenger, vice president for Corporate Public Relations at U.S. Bancorp, said in an email response to MinnPost’s questions. Borrowers are warned each time they use the advance that it is high-cost credit intended to be used only for shortterm needs, she said. They also are informed about alternative credit options that may be available. And the bank imposes mandatory “cooling off” periods as well as limits on the amount and duration of the advance. “A small percent of our customers use CAA, but those who have give the product overwhelmingly high marks and appreciate having it available to them for emergency use,” she said. In its white paper, the Consumer Financial Protection Bureau said that deposit advances and payday loans do, indeed, work as intended for some consumers for whom an unusual expense needs to be deferred for a short period of time. However, it concluded that “a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter.” More than half of the deposit advance users in an in-depth study took out advances totaling more than $3,000, and they tended to be indebted for over 40 percent of the year, typically coming back for an additional advance within 12 days or less of paying off the previous debt. “These products may become harmful for consumers when they are used to make up chronic cash-flow shortages,” the Bureau concluded.

Tips for consumers considering online loans Published June 6, 2013

By Sharon Schmickle The Minnesota attorney general recently offered this advice to consumers considering online loans: • Never do business with an Internet payday lender that is not licensed to operate in Minnesota. To find out if a lender is licensed, check the Minnesota Department of Commerce website at or call (651) 296-4026. • Check the effective interest rate and whether it complies with caps set in state law. • Do not provide your personal and banking information to an online lender unless you are confident in whom you are dealing. Many consumers report being targeted by international

criminal fraud rings after entering their personal information into the website of an online lender. • Hang up the phone if you are targeted by phony collection scammers threatening to arrest you or have you jailed if you do not pay back an amount you do not owe. You can report problems with an unlicensed Internet lender to the Minnesota attorney general’s office by calling (651) 2963353 or (800) 657-3787. Or you can download a complaint form by clicking here (link on website: http://www.ag.state. mn.us/Consumer/Complaint.asp) and mail the completed form to the Attorney General’s Office at: 1400 Bremer Tower, 445 Minnesota St., St. Paul, MN 55101-2131.

Borrowers, beware: Tribal-affiliated loans sound good, but can be costly Published June 6, 2013

By Sharon Schmickle This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. Catch a sports broadcast in Minnesota, and you’re likely to see fast-cash commercials with a legal twist: You can get hundreds – even, thousands – of dollars in your checking account tomorrow. No collateral needed. And don’t worry about state-imposed loan limits because this deal would come from a Native American-owned business. Easy money? Not necessarily. Borrowers who bite on these ads can find themselves in murky legal waters where regulators are powerless to help them settle disputes and courts can’t agree on the reach of tribal sovereignty. Thousands of borrowers have complained to government authorities nationwide about problems with tribalaffiliated loans. They’ve alleged that their bank accounts were tapped for fees as high as three times the original loan amount, their wages were improperly garnished by distant tribal courts and their objections were met by threats of arrests and lawsuits. In Minnesota, Attorney General Lori Swanson has referred some such complaints to the national Consumer Financial Protection Bureau, said her spokesman Benjamin Wogsland. Many tribal lending businesses are legitimate, as are the tribes’ sovereign rights to operate them on their own terms. Indeed, one Minnesota tribe, the Mille Lacs Band of Ojibwe, owns a respected chain of federally chartered banks. But in the bold world of online lending, some nonIndian players are using tribal sovereign immunity as a front – so-called “rent-a-tribe” schemes – in order to dodge state limits on loan amounts, interest rates and collection tactics, federal authorities allege. “These payday lenders are like amoebas, they keep changing forms,” Wogsland said. “The little guy is getting pounded by these loans.” Minnesota crackdown Swanson has moved recently to crack down on non-Indian online lenders who were operating illegally in Minnesota. On May 31, Ramsey County District Judge Margaret Marrinan ordered Delaware-based Integrity Advance LLC to pay $7 million in damages to the state as well as $705,308 in restitution to Minnesota borrowers. The company also was barred from collecting interest and fees on loans granted to Minnesotans unless it becomes properly licensed in the state. Integrity initially denied that it

A screen shot of the Lakota Cash website.

was lending to Minnesotans, but Swanson’s office compiled evidence indicating it had granted at least 1,269 payday loans in the state. It had charged Minnesota borrowers interest rates up to 1,369 percent, far in excess of caps set in state law, the judge said. The case was the eighth recent court victory Swanson’s office has scored against online lenders. Is she now setting her sights on the lenders who claim tribal immunity to get around state law? Wogsland said he could neither confirm nor deny any investigation. Wogsland did say, though, that the office is “aware” of problems with online lenders “claiming they are somehow immune from the law because of some kind of sovereignty.” The concern, he said, arises when the lending operations “are not actually run by a tribal unit but it’s maybe just a rent-a-tribe scenario or an individual member claiming that they’ve got sovereignty and that the laws don’t apply to them.” The new casino It is easy to see why online lending and other forms of e-commerce appeal to tribes, especially those on remote reservations where casino returns have been disappointing, and ultra-high unemployment persists. Think of the online loan business as the new casino, a fresh chance to boost the lives of impoverished people. In fact, the legal reasoning is similar to the argument American Indians deployed more than 20 years ago to launch a new era of casino gambling. It holds that tribal businesses have sovereign rights to set their own rules. Is it the same, though, when the business offers loans to borrowers who are not on tribal land? Going to a reservation

to play slot machines is one thing. Is it comparable for someone to sit in an office on an Indian reservation and negotiate a loan via Internet and/or phone with a borrower who is in, say, Mankato or Anoka or Hibbing? Several states have said no. And the U.S. Federal Trade Commission has moved in federal court to reign in some tribalaffiliated lenders. Sovereign reach? Authorities allege that one lender in particular, South Dakota-based Western Sky Financial LLC, has preyed on debt-burdened consumers -- charging excessive rates, operating without state licenses, and forcing borrowers to fight garnishments before a tribal court that lacked jurisdiction over their cases. Western Sky, which has advertised in Minnesota, did not respond to MinnPost’s requests for comment. On its website, the company lists 17 states where its loans are not available. Minnesota is not listed. In other words, a Minnesota borrower might assume the company has the right to lend in the state. Is that true? Minnesota law requires that lenders be licensed, and Western Sky is not among licensees listed on the state Commerce Department “license lookup” website. But that’s where the sovereignty argument begins. Western Sky’s website emphasizes that it “is a Native American business operating within the exterior boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the United States of America.” Further, it says: “All loans will be subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation. All borrowers must consent to be bound to the jurisdiction of the Cheyenne River Sioux Tribal Court, and further agree that no other state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation.” Battles in other states While Minnesota regulators won’t say whether they are investigating Western Sky, other states have moved to block the company. In April, Oregon’s Department of Consumer and Business Services issued a cease-and-desist order against Western Sky and fined the company $17,500 “for making loans in Oregon without a proper license and for charging interest rates in violation of Oregon law.” The department’s statement said that Western Sky had “promoted its loans through an aggressive TV and radio advertising campaign in many states, including Oregon,” and had charged annualized interest rates ranging between 89 percent and 342 percent. Colorado’s Attorney General sued Western Sky and its owner, Martin A. Webb, in state District Court in 2011 alleging that the unlicensed lender had illegally granted some 200 loans in Colorado. A Colorado District Court judge was not persuaded by Western Sky’s argument that Indian-owned businesses operating on a reservation are not subject to state rules. In a summary judgment finalized this May, he sided with the state, noting that borrowers applied for their loans and received them in Colorado, not the South Dakota reservation. And they repaid

the loans and the finance charges from Colorado, typically by Western Sky withdrawing funds electronically from their local bank accounts. The Colorado court also didn’t buy Western Sky’s requirement that the borrowers submit to the jurisdiction of the Cheyenne River Sioux Tribal Court. Nor does the Federal Trade Commission. The agency has charged in U.S. District Court in South Dakota that Western Sky and affiliated loan companies “sought to unfairly and deceptively manipulate the legal system and force debtburdened consumers throughout the country to travel to South Dakota and appear before a tribal court that did not have jurisdiction over their cases.” The FTC said that Webb also does business under several different names, including Payday Financial LLC, Lakota Cash and Great Sky Finance. A borrower eager for the cash may rush past the fine print saying that any claims will be settled in tribal court. Big mistake, according to the FTC. “When customers fall behind in their payments,

Payday Financial, LLC improperly files suits against them in the Cheyenne River Sioux Tribal Court, attempting to obtain a tribal court order to garnish their wages,” the FTC said in summarizing its case. “The tribal court does not have jurisdiction over claims against people who do not belong to the Cheyenne River Sioux Tribe and who do not reside on the reservation or elsewhere in South Dakota.” At least 15 other states have moved to bar Western Sky. And the Better Business Bureau gives the company an F rating. Although Western Sky and its affiliates did not respond to MinnPost’s e-mails and phone messages, Webb did talk with USA Today for an article published last November. “I think we’re serving a group of people that are underserved by conventional banking,” Webb told USA Today. Webb said that his operation is a major employer on the Cheyenne River reservation. Further, Webb hasn’t disputed claims that his companies’ interest rates can exceed 300 percent. He told USA Today that the rates are high because many borrowers don’t repay their loans. In fact, one Western Sky television ad features a spokeswoman saying, “Yes, the money’s expensive, but there’s no collateral required, and you can keep the cost down by paying it back as fast as you can.” “We’re a very open, honest company,” Webb said.

Rent-a-tribe There is a key difference between Webb and some other tribe-affiliated lenders. While Webb is an enrolled Cheyenne River member, that tribe is not a partner in his businesses. Far more complicated for regulators and courts are cases in which tribes themselves launch online lending operations or forge partnerships with non-Indian lenders in socalled rent-a-tribe arrangements. In 2010, the Better Business Bureau warned cashstrapped families to beware of online lenders claiming they were not beholden to state or federal laws. After receiving hundreds of complaints, the BBB said that lenders, when confronted, typically claimed legal immunity – “often claiming that they are based in another country or on Native American reservations and are sovereign nations.” The BBB also said that the West Virginia Attorney General had “evidence to prove the lenders who claimed tribal sovereignty were not actually part of the tribe but were merely ‘renting’ it for the purposes of claiming shelter from state and federal laws.” A high-profile case surfaced last year when the FTC asked a federal court to stop a network of companies led by race car driver Scott Tucker of Kansas who has claimed affiliation with the Modoc and Miami tribes of Oklahoma and the Santee Sioux Nation of Nebraska. More than 7,500 borrowers nationwide had complained to authorities about the operation, the FTC said. “Like other payday lenders in recent years, this operation has claimed in state legal proceedings that it is affiliated with Native American tribes, and therefore immune from legal action,” the FTC said in a statement. However, it added, the tribal affiliation does not “exempt them from complying with federal law.” The FTC alleges that the operation gained access to borrowers’ bank accounts, claiming it would take out the sum borrowed plus a one-time finance fee, but instead “made

multiple withdrawals . . . and assessed a new finance fee each time.” When borrowers balked, it alleged, they were threatened with arrest, lawsuits and imprisonment. In a typical example, one consumer was charged $1,925 to repay a $500 loan, the FTC said. Rather than leaving the profits with the tribes, Tucker and his brother, Blaine Tucker, allegedly transferred more than $40 million dollars collected from borrowers to another company Scott Tucker controls for “sponsorship” fees that benefit Tucker’s automobile racing, the FTC said. Meanwhile, Larry Robinson, a borrower in Missouri, led a class-action lawsuit against Tucker in U.S. District Court in Kansas City. The complaint alleges that the tribes’ deal with Tucker called for each tribe to be paid a few million dollars upfront followed by 1 percent of gross revenues as “rent” for the tribe’s legal immunity. Colorado authorities have tried for years to block such operations, but the Colorado Supreme Court ruled that the loan businesses were acting as arms of the tribes and therefore were protected by tribal immunity even while they did business off the reservations. Watching from Minnesota Minnesota tribes are watching while the online loan industry takes shape in other states. High-profile legal skirmishes aside, the Native American Financial Services Association argues that there is a compelling reason to justify tribal online lending when it is done responsibly: It can benefit remote reservations where casinos have attracted few outsiders. “Our members in Montana, Oklahoma, North Dakota and other rural areas have difficulty generating revenue and jobs on the reservation due to their distance from population centers,” Barry Brandon, the Association’s executive director, said in an email response to MinnPost. “Tourism is also not an option for some of our member tribes, who have begun innovating through e-commerce. These tribes are generating jobs and revenue . . . by providing a needed resource to underserved consumers.” The association’s members must follow a set of “Best Practices that ensure the tribes’ constitutionally guaranteed rights are protected and that consumers receive high quality financial services,” he said. Spokespersons for several Minnesota tribes said they are not presently in the lending business. John McCarthy, executive director of the Minnesota Indian Gaming Association, said he meets regularly with representatives of the Minnesota-based tribes and he has heard of no plans to launch online loan businesses in the state anytime soon. “You may see more of that as time rolls forward, depending on how the rules and regulations take shape,” he said. Jeff Hargarten contributed to this story.

Financial literacy efforts to fight predatory lending flourish in Minnesota Published July 1, 2013

By Amelia Kaderabek and Jared Anderson This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. When Angelia Mayberry fell $100 short on her car payment, she turned to four local banks for loans. All four turned down the Minneapolis resident. At Payday America, though, Mayberry found a lender more than happy to grant a short-term cash advance. “It does help me out a lot,” the 46-year-old Mayberry said. Mayberry also hoped to build her credit rating as she repaid the loan plus “a little bit of interest,” she said. A little bit of interest? All too often, Minnesota borrowers, who increasingly turn to short-term lenders, do not realize that they are loading up on interest charges that could pile up debt to ruin – not improve -- their credit scores. The Payday America office Mayberry frequents has advertised a package of charges that can add up to an annualized interest rate of 737 percent for a short-term, $100 loan. The allure of quick cash can seduce borrowers into overlooking such high rates, especially borrowers with little financial knowledge or little interest in the details of credit – a fact consumers like Mayberry will admit themselves. “I’m a poor person and very bad with money,” Mayberry said. Too many Minnesotans are “bad with money,” say advocates of a new, coordinated effort to boost financial literacy across the state. They seek to lay the groundwork for sound financial decisions, making Minnesotans better aware of the benefits of financial planning, saving, budgeting and avoiding lenders who force them to throw good money after bad. “The most important thing is to create a culture where financial literacy will be sustained over time,” said Minnesota Commerce Commissioner Mike Rothman, whose department initiated a Financial Literacy Roundtable in 2011, drawing on state departments, local governments, business leaders, nonprofits and others. They created a 12-step action plan focusing on education and outreach for Minnesotans from grade school children to senior citizens. Now Minnesota schools are joining the movement along with a host of organizations from big banks to community action groups. This ambitious movement is breaking new ground even while questions remain about the effectiveness of financial literacy education. Serious problems associated with poor financial choices have spurred public and private groups to try anyway.

MinnPost photo by Mike Dvorak

Middle school students attending financial literacy training by Junior Achievement last January.

‘Making sure kids know about money’ What’s the best mortgage option for a family of four making $48,000 a year? Students at Hopkins High School use a mortgage calculator to find the answer in a typical assignment in David Braaten’s personal finance class. Last fall, the Hopkins school district initiated a new graduation requirement for its students, adding two classes in personal finance to the courses needed to earn a diploma. Braaten, a business teacher who was involved in the program’s conception, believes Hopkins is among the first school districts in the state to take such an action. “Personal finance is of utmost importance as something we want all students to understand before they graduate,” Braaten said. “Given where we are with the state of the economy, can we really look forward without making sure kids know about money?” The courses cover a variety of topics, including budgeting, credit and banking. Junior Jimmy Copouls took the course last fall, and said his experience would make him hesitant to take out a payday loan. “I know they’re risky,” he said, “and if I ever have a mad dash for some quick cash I would rather be in a little debt and take my losses than keep building my debt to a point where I can’t pay it back.” New statewide school requirements Looking to schools statewide, the Minnesota Department of Education released a revised version of its social studies requirements in 2012, creating a new category of personal finance standards for economics courses.

“We worked to create social studies standards that include a strong emphasis on financial literacy and personal finance,” said Beth Aune, the department’s director of academic standards. “There’s been more and more momentum for financial literacy education coming from multiple sectors -government and private.” Rather than create new classes in personal finance as Hopkins has done, schools have the option to work the subject into existing economics courses. Different grade levels must meet different benchmarks, ranging from basic differentiation between “wants and needs” in grades K-3 to creating personalized budgets in grade six to showing understanding of topics like investment and credit in high school. For Braaten, it isn’t enough to add personal finance to already crowded economics curricula. “It should be a designated, well-planned, required course,” he said. “Students need to be immersed in it.” But Aune said that adding too many new requirements limits schools’ flexibility. “If you did make schools require a course, you tie their hands more,” Aune said. “Right now they have the option of doing it that way, like Hopkins is, but they have the choice to do it other ways too, so it gives them more flexibility.” Nationally only 13 states required a course on personal finance to be offered in high school in 2011, and 22 states required a high school course in economics, according to a Council for Economic Education survey.

promote financial literacy. “It’s making sure that people who are unbanked have the opportunity and access to learn about financial capability,” said Rothman, the commissioner. “It’s a challenge.” The Commerce Department has also sponsored multiple town hall meetings to discuss the pitfalls of predatory lending. And Gov. Mark Dayton declared April to be Financial Literacy Month in Minnesota, dedicating 30 days to promoting economic education in the state. It has been a slow-moving effort – mostly discussions, proposals and declarations so far.

Student-run credit union Como Park Senior High School has taken a hands-on approach: opening a credit union branch that serves students and school staff. The school bills the Cougar Credit Union as the first of its kind in the Twin Cities. Students not only get valuable practice in saving and managing money; they also help run the school-based branch of St. Paul Federal Credit Union. Student representatives sit with teachers on an advisory oversight board, and also work as credit union interns. Junior Timothy Smith worked at the branch, helping students open accounts, taking deposits and answering financial questions. “The most that I learned was being able to understand how a financial institution runs; how it’s good to save money and have some for the future, and how money affects peoples’ lives,” Smith said. Building financial habits early is key for high-school aged kids, said Trevor Malone, a coordinator for the Como High program and also a student in business management at Century College. “Right now, learn how to save. If you don’t start saving now, you don’t build those habits. It’s a lot more valuable to understand how money works,” Malone said. Government and grassroots Outside of the classroom, the financial literacy movement has gained ground at state government offices over the past two years. In connection with the Commerce Department’s Financial Literacy Roundtable, 60 stakeholders convened in April 2011 to create an action plan for the state. A related work group brought together the heads of 10 state agencies to

MinnPost photo by Amelia Kaderabek

Junior Timothy Smith worked at the credit union branch in Como Park Senior High School.

“It’s growing,” said Braaten at Hopkins High, “but not very fast.” Nonprofits have been key players in the movement. Junior Achievement, for example, has connected schools with businesses to teach students about money management. “We bring business professionals into the school space to mentor students,” said LaChelle Williams, vice president of education and programs for Junior Achievement of the Upper Midwest. In Junior Achievement’s statewide programs, elementary school students focus on general concepts like wants versus needs, while older students delve into specific issues like debt cycles and predatory loans. One popular program is “Finance Park Virtual,” an online game where students create their own avatars and make budgeting decisions based on a randomly assigned career and monthly income. Players compete for high scores, earning points by correctly calculating percentages, correctly filling out budgets and making decisions that stay within those budgets. Engaging business Big companies are players too. In September, insurance giant Allianz Life announced a $600,000 grant to Junior Achievement and BestPrep, another promoter of financial literacy, to fund educational programs for three years. “The grant ties closely to what we value as a company,” said Laura Juergens, Allianz senior community relations specialist. “Allianz wants to improve the community

and help people make educated financial decisions.” A company known for its retirement plans needs a financially literate public in order to find clients, said Sara Thurin Rollin, Allianz’s public relations director. “We are definitely investing in the future,” Thurin Rollin said. “We hope that if we can teach students how to make smart financial decisions early, they’ll be much more likely to be ready to be our customers down the road.” Wells Fargo has deployed the same logic, providing hundreds of volunteers for Junior Achievement’s financial education classrooms in Minnesota as well as in community groups. Wells Fargo also has assisted with bilingual financial literacy sessions sponsored by the Mexican Consulate, and it offers its financial education program, “Hands on Banking,” in Spanish as well as in English, said spokeswoman Peggy Gunn. Is educating effective? Clearly, there is a need for improved financial literacy, judging from the plight of Mayberry and thousands of other Minnesotans who pay exorbitant interest on payday loans, lose homes to foreclosure and load up credit card debt. But does education truly help them? Does teaching a 17-year-old about personal finance really impact decisions about payday loans and subprime mortgages that he or she likely won’t encounter until years later? Not always, said Rick Nelson, who teaches finance at the University of Minnesota’s Carlson School of Management. Several studies have shown that “people exposed to financial literacy programs and training don’t act very different and don’t retain most of the information,” he said. Researchers at the Chicago Federal Reserve Bank reviewed studies done through 2010. The link between education, literacy, and outcomes is poorly established, they reported. “We find ample evidence that many consumers lack basic financial literacy,” they said. “In some cases, financial education improves financial literacy and behavior, and it is most effective for those who have the least financial knowledge, income, and savings,” they said. “However, it is not clear that effective programs improve behavior through increased literacy, whether programs are cost-effective, or which types of programs are most effective. Answering these questions requires a great deal more research.” Nelson at the Carlson School said, “I don’t know why

these efforts are not very effective.” One possible explanation is that “financial literacy that people need is different at different points” in their lives. Indeed, Nicholas Jaeger of the Minneapolis Urban League said the effectiveness depends on a person’s life stage. “The best time to educate people is during life-changing events,” he said. “Birth of a child, a wedding, graduation from high school -- that’s typically when they’re ready to embrace new ideas and accept new challenges.” Another key, Nelson said, is the financial habits young consumers learn at home. “People’s financial habits are developed by their families,” he said. “It’s useful to teach that at a school level, but it’s hard if those habits aren’t reinforced by families.” Meanwhile, advocates for financial literacy education insist that the need is too urgent to wait years or decades for more research. “High school is a great time to start teaching these things,” said Braaten at Hopkins High. “At that age kids are starting to work and make money. It suddenly goes from abstract knowledge to more real-world stuff. One year from now, kids may not remember specific limits are in place for car insurance. But they’ll know how to ask the right questions.” Sorting good guys from bad But education alone may not be enough, said Myron Orfield, director of the Institute on Metropolitan Opportunity. The University of Minnesota law professor also advocates tougher restrictions on lenders that he says take advantage of low-income and minority groups who have little access to credit “It’s good to have a knowledge about what is an abusive loan,” Orfield said. “That may help some people.” But it also is important to make sure that lenders abide by laws intended to protect consumers, he said. Predatory lenders use the Internet aggressively to pitch easy money, often in defiance of state laws. And some agencies offering credit counseling actually are targeting debt-ridden consumers for further loan scams. Ken Scott, the public relations representative with the Association of Independent Consumer Credit Counseling Agencies, said AICCA counsels around 2 million people every year and works to set the industry standard for consumer protection. “There are good guys and bad guys in every industry,” and consumers need to do their homework, Scott said.

Minnesota sue online, fast-cash lender Published July 11, 2013

By Sharon Schmickle

This article is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. Minnesota has joined nine other states in cracking down on an online, fast-cash loan company that claimed to operate under Native American tribal law thereby circumventing state limits on lenders. CashCall, Inc. of California used Western Sky Financial LLC – which claims to operate under tribal law of the Cheyenne River Sioux in South Dakota – as a front and illegally charged Minnesota borrowers annualized rates of up to 342 percent, according to a lawsuit filed today by Minnesota Attorney General Lori Swanson and Commerce Commissioner Mike Rothman. The borrowers were falsely told that the loans were governed by tribal law, according to a complaint filed in Hennepin County District Court. MinnPost reported in June that lenders claiming to operate under tribal law were advertising in Minnesota and generating complaints to authorities. Borrowers who bit on these ads were finding themselves in murky legal waters and disputes over the reach of tribal sovereignty. Nationwide, some non-Indian players were using tribal sovereign immunity as a front – so-called “rent-a-tribe” schemes – in order to dodge state limits on loan amounts, interest rates and collection tactics, federal authorities allege. ‘A façade’ In the Minnesota lawsuit, authorities allege that loans were held out to consumers as being made by Western Sky Financial, LLC. In reality, they allege, CashCall or its subsidiaries were funding the loans – immediately purchasing them before the borrower had made a single payment. And CashCall collected the interest and payments. Western Sky and its affiliates have not responded to MinnPost’s repeated requests for comment. On its website, Western Sky has emphasized that it “is a Native American business operating within the exterior boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the United States of America.” Further, it has said: “All loans will be subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation. All borrowers must consent to be bound to the jurisdiction of the Cheyenne River Sioux Tribal Court, and further agree that no other

Minnesota authorities reject that claim of sovereign state or federal law or regulation shall apply to this Loan Agreement, its enforcement or interpretation.” Minnesota authorities reject that claim of sovereign immunity. “CashCall uses Western Sky as a facade to fraudulently give the loans the appearance to consumers that they are subject to tribal law, not state law, and therefore not subject to state interest rate caps and other consumer protections,” said a statement issued by Swanson’s office. “Western Sky and CashCall falsely claim that the loans are not subject to state lending laws (including state interest rate caps) because Western Sky’s owner, Martin Webb, is a member of the South Dakota Cheyenne River Tribe,” the statement said. According to the complaint, Western Sky ads offering easy money have lured Minnesotans to borrow between $850 and $10,000 with annualized percentage rates of between 89 and 342 percent. Consumers also have paid origination fees of up to $500 at the front end of the loan, which are financed and subject to the same interest rates. “In other words, a Minnesota resident who wants to receive $1,000 must finance $1,500 -- with $500 immediately going for fees -- and then must repay the full $1,500 at an interest rate of 149 percent,” said the statement announcing the lawsuit. In contrast, it said, a properly licensed lender making a similar loan would only be allowed to charge a $25

fee, with a 21.75% APR. “This outfit has a history of hiding behind front companies to circumvent the legal protections -- including limits on interest rates -- available to borrowers under state law,” Swanson said. “The Internet is flooded with unlicensed lenders, and people need to be on guard.” CashCall also has advertised under its own name in Minnesota. And it has been caught in the past trying to dodge lending laws by using so-called “rent-a-bank” schemes, the lawsuit alleges.

The FTC alleges that Western Sky and its affiliates have attempted to settle claims in tribal court and even obtained court orders to garnish their wages. “The tribal court does not have jurisdiction over claims against people who do not belong to the Cheyenne River Sioux Tribe and who do not reside on the reservation or elsewhere in South Dakota,” the FTC said in summarizing its case.

Other states and federal regulators

The Better Business Bureau gives Western Sky an F rating. In 2010, the Better Business Bureau warned cashstrapped families to beware of online lenders claiming they were not beholden to state or federal laws. After receiving hundreds of complaints, the BBB said that lenders, when confronted, typically claimed legal immunity -- “often claiming that they are based in another country or on Native American reservations and are sovereign nations.” The BBB also said that the West Virginia Attorney General had “evidence to prove the lenders who claimed tribal sovereignty were not actually part of the tribe but were merely ‘renting’ it for the purposes of claiming shelter from state and federal laws.”

F rating

The Federal Trade Commission and at least nine states -- including Colorado, Illinois, New Hampshire, Massachusetts, Oregon, Georgia, Missouri, Maryland and Washington -have taken action against CashCall and/or Western Sky for unlawfully making loans without proper state licensure and in violation of state usury laws. In April, Oregon’s Department of Consumer and Business Services issued a cease-and-desist order against Western Sky and fined the company $17,500 “for making loans in Oregon without a proper license and for charging interest rates in violation of Oregon law.” The department’s statement said that Western Sky had “promoted its loans through an aggressive TV and radio advertising campaign in many states, including Oregon,” and had charged annualized interest rates ranging between 89 percent and 342 percent. Colorado’s Attorney General sued Western Sky and its owner, Martin A. Webb, in state District Court in 2011 alleging that the unlicensed lender had illegally granted some 200 loans in Colorado. A Colorado District Court judge was not persuaded by Western Sky’s argument that Indian-owned businesses operating on a reservation are not subject to state rules. In a summary judgment finalized this May, he sided with the state, noting that borrowers applied for their loans and received them in Colorado, not the South Dakota reservation. And they repaid the loans and the finance charges from Colorado, typically by Western Sky withdrawing funds electronically from their local bank accounts. The Colorado court also didn’t buy Western Sky’s requirement that the borrowers submit to the jurisdiction of the Cheyenne River Sioux Tribal Court. Meanwhile, the Federal Trade Commission has charged in U.S. District Court in South Dakota that Western Sky and affiliated loan companies “sought to unfairly and deceptively manipulate the legal system and force debtburdened consumers throughout the country to travel to South Dakota and appear before a tribal court that did not have jurisdiction over their cases.” The FTC said that Webb also does business under several different names, including Payday Financial LLC, Lakota Cash and Great Sky Finance.

Seeking restitution Some tribal lending businesses are legitimate, as are the tribes’ sovereign rights to operate them on their own terms. And some tribes around the country see the online loan business as the new casino, a fresh chance for those operating on remote reservations to profit. In the case of CashCall and Western Sky, though, Minnesota authorities say they draw the line. “Minnesota is not open for illegal and sham lending businesses that prey on our consumers,” said Commerce Commissioner Rothman, whose Department licenses and regulates lenders making loans in Minnesota. “The Commerce Department is committed to stopping lending schemes that rip off Minnesota consumers with exorbitant interest rates.” The same Minnesota authorities have successfully cracked down on other online lenders who were operating illegally in Minnesota and charging rates far in excess of caps set in state law. On May 31, Ramsey County District Judge Margaret Marrinan ordered Delaware-based Integrity Advance LLC to pay $7 million in damages to the state as well as $705,308 in restitution to Minnesota borrowers. The company also was barred from collecting interest and fees on loans granted to Minnesotans unless it becomes properly licensed in the state. The case was the eighth recent court victory Swanson’s office has scored against online lenders.

‘Unbanked’ Minnesotans hurt most by predatory lending Published July 24, 2013

By Sarah Rose Miller

This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. Many of us remember the day we opened that first bank account. It was a basic step toward economic self-sufficiency – hopefully opening access to the reasonably priced financial services we eventually would need to pay for education, buy cars and homes, and face family emergencies. But more than 360,000 Minnesota households lack that basic access because they are “unbanked” or “underbanked,” according to a 2011 survey by the Federal Deposit Insurance Corporation -- an increase of 70,000 from the FDIC’s 2009 survey. In other words, nearly 17 percent of Minnesota households lacked adequate banking connections in 2011. Connecting those families with safe, affordable and accessible financial services has become an urgent priority for several community support organizations across Minnesota. Largely poor and members of minority groups, these families rely on often-times costly alternative financial services, paying hefty fees for simply cashing paychecks or sending money to pay bills or to help far-away relatives. They have Courtesy of Eva little choice when a car breaks down or a child Song Margolis falls ill but to turn to high interest loans offered by Eva Song payday lenders and pawn shops. Margolis These fees and other charges add up, draining money from folks who can ill-afford it. Many of them fall into cycles of debt that become increasingly hard to break. “These predatory products end up costing individuals and their families significantly, in terms of their whole financial picture,” said Eva Song Margolis, director of the Eastside Financial Center, a division of Lutheran Social Services. Too often, such high-cost products wind up “stripping away the income and savings that people do have,” she said. Exiting a Payday America in Roseville, Sammy Armon expressed his frustration with the debt cycle he is stuck in. Armon uses payday loans to cover other debts. “You take one to pay somebody else.... You take from Peter to give to Paul,” Armon said. Poor credit scores prevent many from accessing reasonably priced loans -- big and small. Credit scores are the biggest determinant in what interest rate a homebuyer qualifies for, according to Tess Rice, general counsel for the Minnesota Bankers Association.

MinnPost photo by Sarah Rose Miller

Largely poor and members of minority groups, these families rely on often-times costly alternative financial services, paying hefty fees for simply cashing paychecks.

Even worse than poor credit though is no credit, Soto said. Immigrants who conduct financial transactions solely through alternative financial services have no credit score, and thus little chance of qualifying for a housing or car loan. CLUES, in conjunction with San Francisco-based Mission Asset Fund, is testing a social lending program designed to improve participants’ credit scores. The Lending Circles program is an organized version of a traditional lending model known in Spanish as a tanda. As such, the format is already familiar to most participants, Soto said. Here’s how it works: Participants contribute monthly to a “pot” which is then awarded to each participant in turn. For the first person who receives the “pot,” it serves as the equivalent of an interest-free loan; for the last person, it is like money in a savings account that is available for withdrawal. What sets Lending Circles apart from the traditional tanda is that, each month, the Mission Asset Fund notifies credit agencies of the payments made as part of the program, thus boosting participants’ credit scores. “A big, big, big benefit that our Lending Circle offers, is the opportunity for people to repair credit, to slowly fix credit, or to establish credit if they don’t have any,” Soto said. CLUES currently facilitates six circles, each with four to 12 participants. Several other circles have successfully run their course.

Approximately 15 percent of American Indians are unbanked nationally, according to the FDIC survey. That makes American Indians about three-and-a-half times more likely to be unbanked than whites. The primary reasons for this disparity are geographical and cultural, said Shawn Spruce, programs consultant at the First Nations Development Institute, a national advocacy organization. Some reservations are remotely located, with no banks or credit unions nearby. In addition, many Native people, especially elders, are uncomfortable with the formalized setting and procedures of banks, Spruce said. Pawn shops, on the other hand, are more familiar. “That goes back to years and years ago when Native American families would come to border towns and they would barter for goods and services,” Spruce said. “People just got into the habit of using pawn shops to get loans and credit… and what we’ve found is that that’s just continued into the 20th Unbanked: No checking or savings account. Culturally responsive loans Among Minnesota’s African immigrants, distrust of mainstream banking runs especially high. Often it is based on immigrants’ experiences with corrupt or dysfunctional financial systems in their former homelands. “The way we use banking in Minnesota is a new concept to them,” said Hussein Samatar, director of the African Development Center (ADC). “Especially if they are from war torn countries, they may not even see for a lifetime a functioning financial institution such as the banking system.” Located in Minneapolis’ Cedar-Riverside neighborhood, home to much of Minnesota’s largely Muslim Somali community, the ADC promotes financial wellbeing through education and counseling. In addition, it has developed a micro-lending system that does not violate the Islamic prohibition on charging interest. These micro-loans, offered as part of the ADC’s business development program, are structured to technically avoid charging interest. Instead of providing an individual with a monetary loan, the ADC purchases whatever the client needs -- high-tech kitchen equipment for a restaurant, for example -- and then raises the price marginally and sells the purchased item to the client over an agreed upon period. This strategy allows many in Minnesota’s growing Muslim community to obtain the capital they need to finance small-business ventures without compromising religious values. The micro-lending program has been thriving, Samatar said. He characterized the program as “the alternative for people who do not want to or cannot go to the bank.” The ADC also provides regular loans with interest. Remote: unbanked on a reservation Of the American Indians employed by the Leech Lake Band of Ojibwe, about 5 percent receive paychecks by direct deposit, said Robert Aitken, who directs financial services. While that does not mean that all other tribal employees necessarily lack bank accounts, it does suggest a lack of banking connections.

Underbanked: Has an account, but continues to rely on alternative financial services, like check-cashing services, payday loans, rent-to-own agreements or pawn shops. Source: Bank On

and 21st centuries.” Don Josefson owns Better Days Pawn in Bemidji. Positioned near three large reservations -- Leech Lake, Red Lake and White Earth -- Josefson’s estimates his customer base as about 70 percent Native American. Like other pawn shops, Josefson’s rates are steep -usually around 25 percent -- but he said that he is not getting rich. “In one sense I feel I run the most honest banking business in America,” he said. “You come in, you’ve got a TV set, we decide it’s worth 150 bucks, I give you 80 bucks…. I’m giving you what I can honestly give you, and [still] try to make a dollar selling your item if you don’t come back.” Aitken, at Leech Lake, doesn’t consider pawn shops a problem for band members. He worries more that the lack of bank accounts makes it difficult or impossible for tribal members to buy homes -- a key step in asset-building -- and to obtain decent loans for business enterprises. Aitken is working to change that last bit. The Leech Lake Band has received a federal grant to start a Community Development Financial Institution, a program designed to provide financial services in low-income communities. Aitken hopes to see that program up and running later this year. Bank On Twin Cities? While many organizations try to assist specific groups, others are taking a broad approach. One is Bank On, which works with mainstream financial institutions, city governments and local community organizations to remove barriers to banking.

The first Bank On was launched in San Francisco in 2006. A year later, the organization had achieved its initial goal of connecting more than 10,000 residents to participating banks and credit unions. That success quickly led other cities nationwide to follow suit. Cassaundra Alder Minneapolis-based financial consultant Cassaundra Adler is working to start a Bank On Twin Cities or a similar organization. A former public policy fellow at the University of Minnesota’s Humphrey Institute, Adler has been a passionate advocate for underserved populations for years. Growing up in a poor neighborhood in Chicago’s west end, Adler learned what it is like to lack financial security. It was normal for women to keep money in their bras rather than in a bank, she said. Security is one of many reasons people need banks. The unbanked are more likely to be crime victims because they often carry cash or keep money hidden at home. They also are more likely to lose money during a disaster. Adler came away from her upbringing with a desire to understand money. And now she does. But she also remembers that rules and fees associated with bank accounts can be confusing. Adler came away from her upbringing with a desire to understand money. And now she does. But she also remembers that rules and fees associated with bank accounts can be confusing. “There’s all sorts of little disclosures and things that people get caught up on, that they don’t know about, so it’s easier for them to live on a cash basis,” Adler said. “When you walk into a check cashing place it’s very clear…or they go to Walmart, and it’s four dollars to cash a check, no matter how much it is. And it’s like, it’s so simple. And that appeals to people.” Indeed, it appealed to Shannon Phillips, 31, North St. Paul, who formerly cashed checks at The Unbank just down the street from her home. “It was convenient…. I could just walk right over there and cash my check,” Phillips said. But now, Phillips has an account at a Wells Fargo bank, and she is relieved to be saving the check-cashing fees. That’s money she could use to realize her dream of opening a hair salon. “I’m not exactly where I need to be financially yet, but I’m getting there,” Phillips said. If Adler has her way, more people will save such fees, and others will come to understand the scope of the problems created when so many Twin Cities residents lack adequate banking connections. Her crusade is gathering public and private support in Minnesota. Among other collaborators, the Northwest Area Foundation conducted a preliminary review to assess the interest in a program serving the Twin Cities. It found “widespread interests in many sectors to address issues of ensuring better access to financial products and services that meet the needs of low-income people,” Gary Cunningham, NWAF’s vice president of Programs-Chief

Program Officer, said in an email response to MinnPost’s query. (While MinnPost’s Lending Trap series is supported by a grant from the NWAF, the foundation played no role in the conception or execution of this report other than to respond to a reporter’s questions; its connection with this issue came up during routine and independent reporting.) The NWAF review also revealed interest in moving beyond Bank On’s traditional starter bank accounts toward a more comprehensive system “to ensure access and financial capability for low-income working people,” Cunningham said. Call it “Bank On 3.0.” Now, Adler is part of the leadership group that is considering the most effective approach. Cunningham said that bankers, state and local officials, and community advocates have expressed interest in “working together to create a better system so that low income people can fully participate in our financial systems.” During the recent housing crisis, much attention was focused on struggling homeowners -- and understandably so. Not as much attention was paid to those without homes, struggling just to get by. Now, though, the housing “triage” has ended, Adler said, and she sees an opportunity to address the needs of the unbanked. “It seems like the time is now. People are focusing on this now, people are having an understanding of the predatory The many reasons people are “unbanked” • Some people believe they don’t have enough money to deal with a bank, and they fear hidden fees such as monthly service charges. • Banks often aren’t conveniently located in low-income neighborhoods. • Deposited checks can take several days to clear, so the money isn’t immediately available. • Some people simply lack knowledge of the often complicated mainstream financial system. • People without U.S.-issued driver’s licenses believe they lack needed identification. • Beware of people who charge you to help you find a mortgage. They do for a fee what you can do on your own for little or nothing. • Some are barred from opening accounts because they have bounced too many checks or made other banking mistakes in the past. • Some low-income people simply don’t trust banks. Or they hold culturally-instilled beliefs that banks are not for them. Source: Bank On

stuff now -- now that the housing market isn’t eclipsing everything,” Adler said. Adler isn’t seeking to supplant the work that organizations like Eastside are doing. Just the opposite. She wants to build on the strong community connections they already have. “That’s exactly what I want to tap into,” she said. “Let’s take all of this expertise and pool it together.… Together we are much more powerful.” Samantha LaBrasca contributed to this article.

New law tightens foreclosure rules in Minnesota Published July 31, 2013

By Sharon Schmickle This article is one in a series of occasional articles funded by a grant from the Northwest Area Foundation. Minnesotans who have struggled to make their mortgage payments will get new leverage for saving their homes beginning Aug. 1 under a law that tightens foreclosure rules in the state. The new law doesn’t necessarily spare homeowners from losing their properties. Instead, it seeks to ensure that eligible borrowers have fair and clear access to every available option to avert foreclosure. It would dovetail with federal law to end some of the confusion that led to massive home losses during the recent foreclosure crisis. MinnPost reported on an early version of the Minnesota legislation as part of its Lending Trap Series. Among other provisions, the new law will make it easier for eligible borrowers to get loan modifications. It also will allow homeowners to collect legal fees if they challenge a lender in court and win the case. The legal fee provision is significant, said Ron Elwood, supervising attorney for the Legal Services Advocacy Project. “It provides the opportunity for more homeowners to be able to take a more proactive role in ensuring the system works as it is intended so that homeowners receive the loan modification or other loss mitigation option or program designed to avert foreclosure for which they are eligible,” Elwood said. The law also bans so-called “dual tracking” of foreclosures. In other words, a lender and/or mortgage servicer can’t move to sell a home until the borrower has had a fair chance to seek a loan modification. Rose McGee, whose dualtracking case was profiled in the MinnPost report, said via email that she still is in her home and she is “working on final details for a settlement resolution” on a new mortgage. McGee and many of the others who had lobbied for the new Minnesota law had trusted in the lifeline offered by mortgage modification only to learn that lenders were nonetheless positioning themselves to take the property. Alternatives to foreclosure The overall point of new state and federal foreclosure rules is to make sure that meaningful alternatives to foreclosure truly are considered, given the chaos that has characterized the

Under Minnesota’s new foreclosure law, a lender and/or mortgage servicer can’t move to sell a home until the borrower has had a fair chance to seek a loan modification.

Creative Commons/Jeffrey Turner

mortgage marketplace in recent years. As millions of borrowers fell behind on their loans, the companies that service those loans were swamped with delinquencies. And some took shortcuts that riled regulators and lawmakers. “People did not get the help or support they needed, such as timely and accurate information about their options for saving their homes,” Richard Cordray, director of the U.S. Consumer Financial Protection Bureau, said in remarks prepared for a mortgage servicing field hearing earlier this year. “Servicers failed to answer phone calls, routinely lost paperwork and mishandled accounts,” Cordray said. “Communication and coordination were poor, leading many to think they were on their way to a solution, only to find that their homes had been foreclosed on and sold. At times, people arrived home to find they had been unexpectedly locked out.” Compromise reached The Minnesota law, which overwhelmingly passed both houses of the Legislature this year, represents a compromise between bankers who had balked at an earlier bill and advocates for distressed homeowners. Representatives of the bankers argued that the earlier, more restrictive, bill would have made lending more risky and expensive in Minnesota. Ultimately, that burden would have

fallen on prospective borrowers, Tess Rice, general counsel for the Minnesota Bankers Association testified. “Lending will be reduced everywhere . . . if it is more difficult to foreclose,” she had warned. The homeowners’ advocates had sought mandatory mediation between banks and homeowners in danger of losing their properties. That provision was dropped in the final bills sponsored by Rep. Melissa Hortman (DFL- Brooklyn Park) and Sen. Patricia Torres Ray (DFL-Minneapolis). The advocates vow to bring the mediation issue back to the Legislature next year. Key provisions Meanwhile, key provisions that did survive in the law include: • A “private right of action.” A homeowner can bring a foreclosure case to court if it appears that the lender has broken the law. And, significantly, homeowners who win their court cases can collect legal fees, including attorney and court fees. • Loan modification. The mortgage holder must offer a chance to modify the loan and also assist the homeowner in submitting the proper paperwork. In a provision that allows more protection than upcoming federal rules, the homeowner can submit a loan modification up to seven days before the sheriff’s sale of the home. And the mortgage holder is required to halt the foreclosure until it is determined whether the homeowner is eligible for modification. • Dual tracking. The law bans the ethically questionable practice of leading the homeowner to believe a modification is in the works while also moving to foreclose on a home anyway. While most of the Minnesota law takes effect on Aug. 1st, some dual tracking provisions will go into effect on Oct. 31. Meanwhile, a National Mortgage Settlement between the nation’s five largest mortgage servicers, 49 state attorneys general and the federal government was supposed to end dual-track foreclosures for many loans. The case initially was prompted by blatant robo-signing of foreclosure documents without checking their accuracy. California passed its own sweeping foreclosure rules last year, and some have credited them with significantly reducing that state’s foreclosure rate.

foreclosures fell by 18 percent. The declines this year follow a drop in 2012, when Minnesota reported 17,895 foreclosures, 16 percent lower than in 2011 and the lowest statewide total since 2006. Despite the recent improvement, HousingLink’s researchers stressed that total foreclosures remain elevated in the state. The 2012 total was nearly three times the number of annual foreclosures in 2005, the first year comparable numbers were compiled. The primary purpose of the Minnesota law was not to outright reduce foreclosure numbers. Instead, it was to “give homeowners the tools to make sure that every available option to avert foreclosure and keep the homeowner in the home” was clearly within reach in the complex foreclosure process, said Elwood, who was involved in negotiating the final deal. “Though not its primary intent, if the primary intent is fulfilled then a reduction in foreclosures would naturally result,” Elwood said. Upcoming federal rules Impending federal mortgage servicing rules, scheduled to take effect in January 2014, also could impact foreclosure numbers nationwide. Under the new rules issued by the U.S. Consumer Financial Protection Bureau, mortgage servicers will not be allowed to issue the first foreclosure notice until an account is more than 120 days delinquent, giving borrowers reasonable time to seek modification. Further, servicers will not be allowed to start a foreclosure proceeding if a modification application is pending. The foreclosure process would start only after a borrower rejected a mitigation offer, failed to comply with the terms of such an offer or received notice that he or she is not eligible for any alternative options. And foreclosure would have to wait until any appeal had been settled.

Foreclosure reduction? It remains to be seen whether the Minnesota law reduces foreclosures here. The ban on dual-tracking and other provisions would not necessarily stop foreclosure for borrowers who fail to make their scheduled mortgage payments. Indeed, foreclosure may be the fairest all-around option in many cases. There were 3,722 foreclosures in Minnesota during the first three months of 2013, down 22 percent from the same period last year, according to research by HousingLink. The seven-county metro area saw the greatest drop, a 25 percent decline year over year. In greater Minnesota,

How saving $40 a month can protect from poverty and predatory lenders Published Aug. 12, 2013

By Sharon Schmickle

from the traps of predatory lenders and from low-skilled and low-paying jobs. Across the state, these dedicated new savers are doing what many had previously considered to be impossible: slowly building assets that can help them achieve goals for a better life. Their movement has grown from a modest program started in the 1990s. Now an ambitious new coalition is taking shape to enlist more Minnesotans in more asset building.

This is the last in a series of articles funded by a grant from the Northwest Area Foundation. The series was produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication. The journalism school’s presentation of the series is at www.sjmc.umn.edu.

Asset poverty in Minnesota Poverty typically is expressed through income levels. By that measure, about 6 to 7 percent of Minnesota households were poor in 2011. Look at assets, though, and 19 percent of Minnesota households were poor that year, according to data compiled by the Corporation for Enterprise Development, a national organization promoting asset building and savings. An asset-poor household, by CFED’s definition, would lack the net worth to subsist at the poverty level for three months should the family’s income stop because of a job loss or other crisis. A family of four with a net worth less than $5,763 in 2012 would be considered asset poor. Not surprisingly, families headed by single women and minorities were far more likely to fall into asset poverty. The ultimate solution MinnPost photo by Sharon Schmickle

Bukola Oriola in her new beauty shop.

Could it be possible for Bukola Oriola to come up with $40 a month to stash in a savings account? A sad series of events had led Oriola from her homeland, Nigeria, in 2005 to a life of near isolation among strangers in the northern Twin Cities metro area. Her unsteady income from braiding hair already was stretched to the max to support her and her pre-school son, Samuel Jacobs. On the other hand, how could she afford not to save the money? She had been accepted into an Anoka County chapter of a program called Family Assets for Independence in Minnesota (FAIM). The program would match every $40 she saved with $120, money she eventually could use to open a new beauty shop. So Oriola mustered the self-discipline to be her own demanding creditor. The $40 would be a bill she had no choice but to pay every month. Never mind the other pulls on her pocketbook. Riding on the savings “bill” was her best hope for the future. It would be paid by pinching here and there on all of the other things she and the boy needed. “The program was always on my mind, and I knew what I needed it for,” Oriola said. Oriola had joined thousands of other Minnesotans who have come to see savings accounts as salvation — from poverty,

Asset building can be the ultimate solution to the many problems highlighted in MinnPost’s Lending Trap Series, said Pam Johnson, of Minnesota Community Action Partnership in St. Paul. Savings accounts connect people with banks and the financial mainstream where they are less likely to squander money on payday loans, deposit advances and subprime mortgages. “You can help people think more long term and help them achieve that asset they are shooting for . . . help them make the sacrifices needed to reach that long-term asset goal,” she said. The Great Recession and the parallel collapse of the housing market set back – and, even, drained – savings for many families, Johnson said. But it also served as a potent reminder of the importance of saving in the first place. “Our nation woke up and realized that we can’t just be living on credit,” Johnson said. “It helped to normalize the concept of saving for future spending versus putting everything on the credit card. . . . But it’s sad that it had to happen the way it did.” Now, a new organization, the Minnesota Asset Building Coalition, aims to boost the savings momentum across the state. The coalition is funded by the Otto Bremer Foundation and the Northwest Area Foundation. It also gets office space and other support from the Legal Services

Advocacy Project. Its leadership committee includes representatives of many prominent Minnesota non-profits. (Note: MinnPost’s Lending Trap series is supported by a grant from the Northwest Area Foundation, but the Foundation had nothing to do with the inception and execution of this article.) The notion of building assets for the future can mean different things in different communities, said Dave Snyder, the coalition’s coordinator. Snyder has crisscrossed the state for several months listening to local needs – from small towns to American Indian reservations to inner city neighborhoods. In some communities MinnPost Photo by Sharon Schmickle Dave Snyder such as St. Cloud and Mora, a pressing need is transportation to jobs, Snyder said, and the solution could be individual savings accounts dedicated to buying cars. Elsewhere, the lists of needs and goals include affordable housing, education funding and start-up money for businesses. Model with a track record While there is no cookie-cutter approach to fulfilling any one community or family asset need, there is a wellestablished model in the FAIM program that helped Oriola save for her future. Between 1999 and 2012, low-income Minnesota workers in the program earned and deposited more than $2.5 million in savings accounts. One-third of those savers capitalized small businesses, one-fourth purchased first homes and 41 percent paid for higher education. The savings, typically $40 a month, had to come from income earned in a household below 200 percent of the federal poverty level. The enticement was a 3-to-1 match coming from state and federal funds. Do the math, and you find that a saver who stayed with the two-year program could have $3,840 in the bank. The program also required savers to take financial literacy training and to attend classes geared toward their specific savings goals. The lessons apparently stuck, according to assessments done last year by students at the University of Minnesota’s Humphrey School and at Gustavus Adolphus College: • Of 130 FAIM-sponsored small businesses contacted in the survey, 89 percent were still in operation after two years, compared with a national average of 44 percent. • Of 81 other FAIM graduates surveyed, 67 had purchased homes and none reported foreclosures. • Of 115 FAIM graduates who had set higher education as their goals, 65 percent had completed a degree or certificate and 31 percent still were in school. Further, 57 percent said their incomes had increased. The researchers also found that the vast majority of FAIM graduates had used no risky financial services – payday loans, check cashing stores, direct deposit loans, etc. – within six months of the surveys.

The program has enjoyed bipartisan support in the Minnesota Legislature. Until the budget-busting Great Recession, the state appropriated about $250,000 a year to match federal funding. The support was slashed in 2011, but it was partially restored in 2012. And this year’s Legislature restored the full $250,000 a year for the next two years. At the offices of the Anoka County Community Action Partnership, residents have used the FAIM program to achieve goals such as paying technical college tuition, buying tools for automotive technician training and setting up a tree cutting business, a tax-preparation service and a taxi company. Pathway to home ownership For Kristina Sahr, the program provided a pathway to home ownership. As a single mother, she had been living at her parents’ home with her young son while she worked part time and took classes at Anoka Technical College. After she earned her Associates degree and landed a secretarial job, she was ready to live on her own except for one obstacle. “I had no savings,” Sahr said. Then she heard of the FAIM program. MinnPost Photo by Sharon Schmickle Like all FAIM enrollees, Kristina Sahr Sahr was required to take 12 hours of financial fitness training. She learned how to establish and build a credit rating – and also how to repair one that had gone bad. She learned about the pitfalls of payday lending and the value of mainstream banking connections. Because Sahr’s goal was to buy a home, she was schooled for another 10 hours in the principles of home finance and budgeting for mortgage payments. Others took the extra training in financing higher education or operating small businesses, depending on their stated goals. “The biggest thing for me was making a budget, sticking to it and saving for the future,” Sahr said. Such are the challenges for workers at many income levels. Judy Bond, FAIM coordinator at the Anoka County program, urges her trainees to comb through their spending for little things that can add up such as money dropped into vending machines for candy or soft drinks. “When they ask, ‘How can I save $40?’ I tell them that if a big lump sum of $40 seems too much, think of saving $10 a week,” Bond said. In other words, they could hit their mark by foregoing $2 of spending each day – say, giving up a daily cup of highend coffee. “By doing that, they will have the $10 at the end of the week,” Bond said. “And if they do it for four weeks, there’s the $40. And they didn’t even miss it!” In a sense, Bond and other FAIM coordinators are coaching people to swim against the marketing currents that surround Americans with a steady stream of temptations to

spend. “In so many areas, you are bombarded by people who are trying to sell you something,” said Jan Backlin who directs homeownership programs at the Anoka County facility. “When we do the financial fitness classes, we emphasize this. When you are standing at the grocery story waiting to make your purchases, there is all of this last-minute stuff we really don’t need – gum, magazines, candy.” And don’t get her started on the premiums people pay for designer brands. “You are being brainwashed,” she tells FAIM trainees. “You have to think about what you want and what you really need.” It’s not that these FAIM coaches are against spending and shopping. Their drive is to teach people how to be smarter about spending by saving ahead. Sahr saved up enough money to buy a three-bedroom rambler in Blaine. It needed a lot of “TLC,” she said, but it was on a cul-de-sac where her son could ride his bike. And at $120,000, the price was right. Still, it was a big step. “I was definitely nervous,” she said. “Would I be able to do this? Would everything work out?” But she also had the confidence that comes with money in a bank and a budget on paper. She closed on the house in 2003. “It was very empowering,” Sahr said. Since then, Sahr has earned a Bachelor’s degree in human resources management and stepped up to a professional job with the county. Her family still lives in the home she bought 10 years ago. Key to a business Bukola Oriola took a different track at the Anoka County FAIM program. She urgently needed more income. Before leaving Nigeria in 2005, she had been married through a traditional arrangement to a man in Minnesota. After she moved to his home in Ramsey, she said, she was isolated and abused. (She has written a self-published book about the experience, “Imprisoned: The Travails of a Trafficked Victim.”) With the help of supportive community services, Oriola broke free of the relationship, taking her young son with

MinnPost Photo by Sharon Schmickle

Jan Backlin, standing, and Judy Bond in the Anoka County FAIM office.

her. By word of mouth, she had built up a small hair braiding business, earning enough to rent a tiny workspace in Anoka. But the income was small and sporadic. She needed a real shop, equipped with mirrors, a hair-washing stand and a proper beauty chair. Then came acceptance in FAIM in 2010. Her declared goal was to save enough to upgrade her small business. Oriola did what had seemed impossible. She built up enough money to rent a space in Spring Lake Park that was more than three times the size of her old shop, to furnish it and to pay the rent for the first three months. A flashy neon sign marks her door, and one wall displays a well-stocked collection of combs, hair pieces and other paraphernalia that goes with beauty. Oriola said she needs to do more marketing before she can declare the venture a complete success. “I am making just barely enough to pay the rent and support the family,” she said. Still, the start she has earned by saving money is “a miracle,” she said.

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