Abusive lending practices not only harm indi- vidual consumers, but they place a needless drag on the overall U.S. economy. Abusive lending practices include those in which the lender charges excessive fees and interest rates; lends without regard to the borrower’s ability to repay; renances a borrower’s loans repeatedly over a short period of time without any economic gain for the borrower; or com- mits outright fraud or deception.10
Consumers experiencing abusive lend- ing practices pay much more for their loans than other consumers and often get trapped in cycles of debt from which they cannot emerge. As a result, these consumers have fewer re- sources to devote toward building family wealth.11 This is especially true of consumers who are of modest means and just trying to make ends meet. Indeed, numerous studies have documented the harms to consumers re- lated to these abusive lending practices.12
10 See, e.g., Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50,580, 50,581–83 (Aug. 31, 2007) (Depart- ment of Defense nal rule) (describing characteristics of payday, auto-title, and military installment loans that are abusive).
11 For a discussion of how consumers in poverty pay more for basic goods and services and, thus, nd it difcult to build real wealth, see Matthew Fellowes, The Brookings Institution, From Poverty, Opportu- nity: Putting the Market to Work for Lower Income Families (July 2006), available at http://www.brookings .edu/reports/2006/07poverty_fellowes.aspx.
12 See, e.g., Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50,580, 50,581–83 (Aug. 31, 2007) (Depart- ment of Defense nal rule); Amanda Quester & Jean Ann Fox, Center for Responsible Lending and Consumer Federation of America, Car Title Lending: Driving
2 5 Updated Small Dollar Loan Products
The overall domestic economy also is harmed because these practices distort consumer spending. They lessen consumer resources devoted to building productive as- sets (such as educational achievement and home ownership) and divert resources to less productive uses such as the payment of mul- tiple loan fees or high nance charges. The subprime mortgage lending crisis that came to a head beginning in 2007 exemplies how abusive lending practices can harm the overall economy. Had stronger consumer protections governing mortgage lending been in place, the resulting harm to consumers and the overall economy would likely not have been as great. Indeed, these real and potential harms to the individual and to the overall economy are so signicant that they outweigh the countervail- ing notion that lenders and individuals should be free to contract at any rate and terms.13
To determine how states have exercised their historical responsibility to address abu- sive lending, the Scorecard examines the
Borrowers to Financial Ruin (Apr. 14, 2005), available at http://www.responsiblelending.org/issues/car- title/reports/page.jsp?itemID=28012839 (describing abuses of auto-title loans); Uriah King, Leslie Parrish, Ozlim Tanek, Center for Responsible Lending, Finan- cial Quicksand: Payday Lenders Sink Borrowers in Debt with $4.2 Billion in Predatory Fees Every Year (Nov. 30, 2006), available at http://www.responsi- blelending.org/payday-lending/research-analysis/
13 See, e.g., Sonia Garrison, Sam Rogers, Mary L. Moore, Center for Responsible Lending, Continued Decay and Shaky Repairs: The State of Subprime Loans Today (Jan. 2009), available at http://www. responsiblelending.org/mortgage-lending/research- analysis/continued _decay_and_shaky_repairs.pdf (assessing damage caused by subprime mortgage crisis).
NATIONAL CONSUMER LAW CENTER