This legislative season there are a number of asset building and asset protection bills before the Illinois General Assembly. Here’s our March Legislative Update:

Automatic IRA (SB3278 / HB4497)

IABG is working to educate legislators about asset poverty and the role of retirement savings in building financial stability over a lifetime. This session, IABG introduced Automatic IRA legislation (SB3278 / HB4497) that would require businesses of a certain size to provide access to a retirement savings plan. As the wealth gap in Illinois grows so does the need for an Auto IRA program. This innovative proposal could bridge the retirement savings gap and help low- to moderate-income workers save for their retirement. While the bill did not move out of committee, IABG plans to continue educating legislators through subject matter hearings later this spring.

Car Title Loan Reform (HB 4603)

IABG also supported the efforts of our partners at Illinois People’s Action to protect borrowers from abusive car title lending. HB 4603, which limits interest on car title loans, failed to make it out of House committee, a disappointing setback that keeps Illinois in the minority of states allowing predatory lending at triple-digit rates. However, there are a number of other consumer protection bills that remain alive, including regulations on refund anticipation loans (SB3523).

Internet & Out-of-State Payday Lenders (HB3935)

On February 22nd, the Illinois House passed HB3935 – a measure that would crack down on non-licensed payday lenders. State Representative Greg Harris, sponsor of the proposal, said, “This legislation will provide protections for Illinois residents against the illegal and abusive lenders who operate outside of the law.” He introduced the bill after hearing about foreign companies that offered individuals loans online and left many borrowers in a destructive cycle of debt. HB3935 amends the Consumer Installment Loan Act. The bill now moves to the Senate.

Debtor’s Prison (HB 5434 & HB4695 / SB3234)

Debtor’s prisons are once again a growing problem in our state. Borrowers taking out consumer installment loans who fail to appear in court after missing payments, can be arrested and imprisoned. There are two measures currently before the general assembly that would address this problem. HB 5434 would eliminate the practice of “pay or appear” for low-income borrowers. HB4695 / SB3234 would prohibit creditors from requesting the arrest of borrowers who cannot pay and require them to develop an internal policy regarding the prevention of debtor incarceration.

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Last week, the Woodstock Institute released their report “Struggling to Stay Afloat: Negative Equity in Communities of Color in the Chicago Six County Region.” The report found that Chicago homeowners with mortgages in predominantly African American neighborhoods are twice as likely to be underwater than homeowners with mortgages in predominantly white neighborhoods.

A home with negative equity means that the homeowner owes more than their home is currently worth – referred to as being underwater.

Chicago’s communities of color have been disproportionately impacted by the foreclosure crisis. According to the Woodstock report, “64% of Chicago’s vacant, lender-owned properties were concentrated in highly in African American communities and those properties remained on the market 25% longer and lost more value than did similar properties in other communities.” The impact of these vacant properties and higher levels of foreclosure rates is a decline in home values across the community.

As a result, we are seeing a significant increase in the number of properties that are underwater in communities of color. The report found that:

• Nearly 1 in 4 homes in the Chicago region is underwater with close to $25 billion of negative equity
• In African American communities, 40.5% of borrowers are underwater while 40.3% of homeowners in Latino communities are underwater. In comparison, only 16.7% of properties in predominantly white communities are underwater.
• In African American and Latino communities about 30% of homes have loan-to-value (LTV) ratios that exceed 110%. A borrower with a LTV greater than 110% is more likely to default on her or his loan.

While these numbers are a call for immediate attention, they are in line with what we are seeing across the country – an expanding racial wealth gap. A report in July of last year from the Pew Research Center found that the average wealth of white households is 20 times that of black households and 18 times that of Hispanic households. We see similar asset inequality in Illinois where close to 50% of households of color are asset poor compared to less than 20% of white households.

Much of the increase in asset poverty among communities of color and the widening of the racial wealth gap is due to the decline in home values. The decline in home values and the prevalence of homes with negative equity, described in the Woodstock report,  has an impact on and can be influenced by other factors that contribute to the racial wealth gap, including the credit gap, education gap and the savings gap.

As we think about asset building policy, it’s important to note that having wealth is not the same as being wealthy. Modest assets, including savings, retirement accounts, or a home can bring financial stability to a family and a community.

The recent economic crisis has revealed that racial disparities continue to exist. Without wealth, families and communities cannot become and remain economically secure. Public policies have and continue to play a major role in creating and sustaining the racial wealth gap, and they must play a role in closing it. In an effort to address negative equity, the Woodstock Institute recommends the following policy changes:

1. Mortgage services should use principal reduction 9rather than rate reduction or loan extension) as a foreclosure prevention tool more broadly.
2. The Federal Housing Finance Authority should permit loans backed by Fannie Mae and Freddie Mac to be eligible for principal reduction.
3. Mortgage servicers should streamline the processes for short sale.

Policies, such as those recommended by the Woodstock Institute, can begin to address wealth inequalities. Moving forward, we need to continue to create asset building opportunities that will close the wealth gap.

Banking the unbanked has been an important part of the asset building policy agenda. Low-income individuals, in particular, get strapped with high fees when executing routine financial transactions using risky financial products. Mainstream banking has been seen as the safest way to protect and build assets in low-income communities. But that’s not always the case. In fact, the high cost of banking has deterred low-income individuals from staying banked.

A recent policy paper from the New America Foundation offers insight into the financial choices of low-income individuals who have figured out how to avoid fees associated with risky financial products and banks alike. The findings suggest a more nuanced approach to asset building policy is needed: We must first understand how vulnerable populations manage their money and advocate for policies that create financial stability, not instability.

Findings from the paper came from interviews with 37 recipients of the Temporary Assistance for Needy Families (TANF) cash assistance benefit in California. Most of those recipients were turned off by bad experiences with checks or automatic payments from banks accounts. They opt for cash or money orders instead.

The paper states, “The central role of cash in financial management is a constant theme. A number of respondents were wary of using anything but cash or money orders to pay bills.”

Across the nation, 9 million households are unbanked. In Illinois, more than 1 million households are either unbanked or underbanked. The average unbanked worker in Illinois spends $574 a year to cash their payroll checks. And 16% of the underbanked have obtained at least one loan from a payday lender, which typically leads to a cycle of debt.

Almost all of the TANF recipients interviewed had an account at a bank or credit union that had been closed. The main reasons: overdrafting the account or failing to pay penalties. For those interviewed, the fees and penalties made it prohibitive to keep the account open.

One woman told of forgetting about her automatic withdrawal for her car insurance. The $30 overdraft ended up costing more than $200 because of penalties. The bank closed the account before the woman could offer to make small, monthly payments to clear the charges.

Prepaid cards were popular among those interviewed, especially if those cards had a Visa, MasterCard or similar logo that lent credibility. The main motivation for using these cards, despite their high fees, was that they weren’t banks.

Using information gleaned from the interviews, the New America Foundation paper offers policy recommendations under four themes.

1. Reduce the cost of routing financial transactions:

• Brand Electronic Benefits Transfer (EBT) cards with Visa or Mastercard.
• Make EBT cards reloadable.
• Make withdrawals from EBT cards no-fee.

2. Enable families to save money and plan for the future:

• Provide a savings “bucket” to EBT.
• Eliminate asset limits and reduce reporting requirements.

3. Encourage attachment to safe and affordable banking products:

• Encourage development of basic bank accounts.
• Explore the potential of new products.

4. Explore ways to help families cover unexpected expenses:

• Offer automatic savings options.
• Offer small loans for those transitioning off assistance.

The policy paper should be considered “required reading” as our thinking and understanding of asset building policy evolves and as we continue to advocate for safe banking products that address the needs of low-income individuals.

Legislation to limit interest on car title loans failed to make it out of House committee this week, a disappointing setback that keeps Illinois in the minority of states allowing predatory lending at triple-digit rates.

HB4603 won only five votes in the 21-member Consumer Protection Committee in the Illinois General Assembly. The vote was cast after hearing testimony from a number of leaders from Illinois People’s Action (IPA). IPA has been working across the state to educate residents about the impact of car title loans and lift up the stories of families that have been impacted.

The bill, which IABG supported, has several key provisions that would protect Illinoisans, particularly those who are low-income:

• Limiting annual interest to 36%, which the Center for Responsible Lending recommends
• Requiring the loan term cannot be less than 4 months nor more than 12 months
• Prohibiting repossession of a vehicle after 100% of the principal interest has been paid
• Mandating the lender to comply with the Fair Debt Collection Practices Act
• Prohibiting the debiting of bank accounts of individuals with these loans
• Restricting loans to only vehicles with titles from another state or whose owner is not an Illinois resident

Illinois is one of only 16 states that allow car title lending outright though another four states allow it through a legal loophole.

No matter how you slice it, car title loans are horrible for consumers. These loans use a borrower’s vehicle as collateral and additionally charges triple-digit interest rates, like those of payday loans.

In Illinois, interest on these loans can reach up to 300%, meaning someone who borrowed $1,000 against the value of his or her car would pay more than $2,000 in interest alone.

In 2011, almost 100,000 car title loans with interest rates of 300% were made in Illinois. These loans are made based on the value of the borrower’s car, not his or her ability to pay the money back. Most borrowers renew their car title loan 8 times, while their required payments balloon out of reach.

While the House committee vote is stumbling block, it does not deter efforts of advocates across the state to regulate car title loans in Illinois. Enacting a 36% annual rate on these loans is actually more lenient than other states. To date, 31 states have outlawed car title loans altogether. Illinois needs to join the chorus of states that see car title loans as the predatory lending practice that they are.