Self Help For Consumers

Setting the Record Straight: Self-Help Lives Up to High Standards April 21, 2008

As state after state enacts laws to curb high-interest rate “payday loans”, the payday lending industry is turning its lobbying and public relations power against groups that expose the predatory nature of their product. One of their targets is Self-Help and its policy arm the Center for Responsible Lending (CRL), which advocate for an interest rate cap of 36 percent for all consumer loans. Payday lenders complain this rate cap will put them out of business, and have indeed left places like Washington, D.C., North Carolina, Georgia and Oregon since interest rate caps have been enforced. In their newest attempt to halt state reforms, payday lenders have created a fake “grassroots” group called the Consumers Rights League (CR League) to attack Self-Help and CRL by spreading misinformation about the groups’ work. CR League has falsely characterized Self-Help’s community development lending and public policy work as self-serving, but the facts prove otherwise. Self-Help’s lending record, business practices, financial strength, and advocacy efforts have been strong for over 20 years, and focused on its mission of helping low-income and underserved individuals and families create wealth. Since 1980 Self-Help has helped over 60,000 borrowers buy homes, build small “The reason all this is important is that businesses, and strengthen communities in there’s a war of words on… Subprime and North Carolina and around the country. Self-Help was recognized as one of twelve payday lenders in particular are fighting hard high-impact U.S. nonprofits in the book to fend off long-overdue reforms aimed at Forces for Good, along with other shutting down their three-card-Monte organizations such as Habitat for Humanity, business practices. Eakes and his group The Heritage Foundation, Teach for exposed abuses in subprime and other America, National Council of La Raza, and lending—mostly by doing the research and YouthBuild USA.1 reporting, it should be added, that put business-news organizations…to shame.

Background CR League was launched in early 2008 and, according to the Columbia Journalism Review, “appears to exist for no other purpose than to attack [Self-Help CEO Martin] Eakes and promote the payday lending industry.”2 The organizations behind the CR League—most notably FreedomWorks—appear to have many ties with the payday lending industry.3

Now the Swift Boat-style campaigns against borrowers and their advocates have begun...” Columbia Journalism Review “Forbes’ Failed Probe” (March 12, 2008) http://www.cjr.org/the_audit/forbess_contortions.php? page=all

This is not the first time payday lenders have tried to discredit Self-Help, which has consistently opposed their 400% annual percentage rate loan product that traps consumers in high-cost debt. In 2005 a Washington think-tank, the Capital Research Center, worked with the payday lending trade association on a report attacking Self-Help’s lending record and advocacy efforts to halt payday lending.4 The report included a false charge—publicly 1

refuted by both federal and state credit union regulators—that Self-Help Credit Union had made insider loans to executives.5 CR League has recycled many of these discredited claims against Self-Help in its “Predatory Charity” report, published in February 2008. Many of the same false allegations also appeared in an article published at the same time by Forbes magazine.6 However, the Columbia Journalism Review analyzed the Forbes article and concluded that “the piece crosses the line from tough to unfair by trying to cast benign or irrelevant facts as somehow sinister.”7 The CR League report demonstrates the same flaw.

CR League Gets It Wrong They say…

But the Truth is...

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Self-Help attacks other lenders for using predatory practices that it employs.

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As a community development lender, Self-Help offers responsible loan products at fair rates. It seeks to live up to the standards pushed for in its advocacy work.

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Self-Help has amassed financial resources for its own benefit.

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Self-Help has built its financial soundness in order to continue its community development work.

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Self-Help’s advocacy work through CRL is based on flawed research.

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The Center for Responsible Lending’s advocacy work is based on rigorous datadriven research and Self-Help’s 24 years of lending experience.

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Self-Help has different financial results than other credit unions, so it must be doing something wrong.

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Self-Help Credit Union looks different than its “peer” credit unions because its primary focus is providing homeownership loans to low-income and under-served families.

Fact #1: As a community development lender, Self-Help offers responsible loan products at fair rates. It seeks to live up to the standards pushed for in its advocacy work. Self-Help Credit Union has grown in the past several years as a result of strong demand for small-business loans and homes loans in North Carolina, primarily in disadvantaged communities that are underserved by mainstream lenders. •

Mortgage Lending: Virtually all Self-Help mortgage loans are fixed-rate loans made to borrowers who do not fit conventional lending guidelines. These mortgages are priced substantially lower than other subprime mortgage loans, carrying a 1% origination fee and no private mortgage insurance. Self-Help has been a subprime mortgage lender for 24 years, but unlike many subprime lenders it does not charge prepayment penalties, and has maintained the strong underwriting guidelines that others abandoned (e.g. documenting income and the borrower’s ability to repay their loan). Additionally, Self-Help gives borrowers the lowest rate they qualify for; it 2

does not permit its loan officers to increase the rate in exchange for a kickback (yieldspread premium). In fact, if a loan applicant can qualify for a lower-cost conventional mortgage loan, Self-Help tells them so and refers them to local banks. •

Overdraft Loans: Self-Help does not provide fee-based overdraft loans, but instead offers customers an overdraft line of credit that is capped at a 16% annual percentage rate of interest. Self-Help has been publicly and equally critical of credit union feebased overdraft loan programs as it has been of banks’ programs.8

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Payday Lending: Self-Help has never Self-Help Lending Record offered payday loans and does not Since 1980 benefit from CRL’s advocacy work in Home Financing: $4.8 billion, 53,459 this area. It opposes 400% APR payday homeowners loans because they do significant Small Business Lending: $336 million, financial harm, especially to low-income 2,848 loans, 22,115 jobs created or 9 families. Since payday lending has been maintained outlawed in North Carolina, the bulk of Community Facilities Lending: $179 small consumer loans are made by million, 733 loans, 27,509 childcare spaces, financial institutions and consumer 22,683 public charter school spaces, 8,128 finance companies already doing jobs created or maintained business in the state.10 Contrary to payday lending industry charges, SelfReal Estate Development: $85 million Help cannot profit from the shutdown of invested, 103 homes and 16 commercial properties built or renovated payday lending in Georgia, Washington, D.C., Arkansas, New Hampshire, Oregon, and West Virginia, and from efforts underway in Virginia, Ohio, and Colorado to impose rate caps. Not only does Self-Help not offer payday loans, it does not make consumer loans in any of those states.

Fact #2: Self-Help has built its financial soundness in order to continue its community development work. •

Self-Help has strict policies that prevent insider loans or other self-gain by executives. Self-Help does not allow ANY senior official or board member (or their family members) to borrow AT ALL from Self-Help. It is the only retail financial institution we know of that does not allow its senior officials to even get personal credit cards. CR League has resurrected the false allegation of insider loans—even though they know it was refuted by state and federal regulators11— in an attempt to damage Self-Help’s reputation. In addition, all Self-Help executives are subject to a company-wide salary cap: currently $69,000 annually for North Carolina.12 Self-Help’s management works there for many reasons, but getting rich isn’t one of them.

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Self-Help uses grants from government and private funders to support lending — at reasonable rates—to higher-risk borrowers and in communities that are underserved by conventional lenders. For example, grants help support Self-Help’s loans to childcare facilities in North Carolina, which carry only a 5 percent interest rate on average. Similarly, Self-Help makes loans to public charter schools that are 3

often at below-market rates and with less-than-full collateral. At the same time, SelfHelp provides many hours of (free) technical assistance to small business owners, and makes small business loans for as little at $2,000; both are things that conventional lenders cannot afford to do. Grant funds also provide downpayment assistance for families to become homeowners without putting substantial money down, and support Self-Help’s work to revitalize neighborhoods by fixing up dilapidated houses and reselling them to first-time homebuyers. •

Self-Help only forecloses on loans as a last resort. Its low loss rate (well under 1% per year throughout a 24-year lending history) shows this is a rare occurrence. Self-Help is a lender and not a government give-away program. SelfHelp tells borrowers very clearly up front that it will collect and foreclose if they do not repay their loans; otherwise it would not be able to help other borrowers in the future. With 60,000 Self-Help loans financed by Self-Help Credit Union and its nonprofit affiliate, Self-Help Ventures Fund, to higher-risk borrowers, it is inevitable—although still unfortunate—that some foreclosures would occur. Self-Help works closely with its home and commercial borrowers so that foreclosure is an absolute last resort.

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Self-Help’s commercial real estate investments support its work and help other small businesses and nonprofits. When finding office space for staff, Self-Help has found it often makes economic sense to own rather than rent—it's a better use of limited resources and protects against rising rents—and has followed this practice in North Carolina for the last 20 years. Many nonprofits own their buildings, including nonprofit industry associations such as the Mortgage Bankers Association.13 Further, Self-Help makes space in its buildings available at attractive rents to other nonprofits and small businesses in North Carolina and D.C.

Fact #3: The Center for Responsible Lending’s advocacy work is based on rigorous data-driven research and Self-Help’s 24-years of lending experience. •

CRL’s research is well-respected. It has published an array of reports on mortgage lending, payday lending, and abusive overdraft loans that quantify the cost of predatory lending to communities and families.14 Among others, the Federal Reserve Board has praised CRL's research, saying "CRL has produced ground-breaking research on the subprime mortgage market and has been a key advocate for state and federal protections that reasonably balance consumer interests with the goal of increasing sustainable homeownership with affordable loans."15

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CRL‘s research is based on real market experience and data, strong statistical research methods, and peer-review. CRL analyzes large databases of financial transactions to identify issues and market trends. These include databases of millions of mortgage loans, house price forecasts in every U.S. market, data on tens of thousands of payday loans and over three million checking account transactions. These datasets, developed by federal and state regulators and commercial firms like Forrester Research, McDash Analytics, and Moody’s Economy.com, are publicly available, in contrast to proprietary datasets used by some industry-sponsored researchers. CRL’s research team cumulatively has decades of experience in the areas of financial services, housing, consulting, law, asset building, and statistical analysis. 4

Its research methods are rigorous and fully-documented in studies, and it adopts conservative assumptions when compensating for incomplete data or adjusting for other market conditions. CRL’s research has been published in peer-reviewed journals, including Housing Policy Debate and the Journal of Economics and Business,16 and its Research Advisory Council includes respected academics and leaders from major universities and research institutes.17 Attacking CRL’s Research: What CR League “Forgot” to Mention On CRL’s “Losing Ground” report: “While subprime mortgages have faced significant problems, they have fallen predictably short of CRL’s dire predictions.” Forgot to mention: CRL projected 1.1 million new foreclosures, and a 19% foreclosure rate. Moody’s Economy.com and others now estimate 2.0-2.5 million foreclosures and Fitch Ratings predicts a foreclosure rate of 43%.

On CRL’s “Race Matters” report: “[CRL’s report] contains severe weaknesses and presents conclusions that are overstated at best and misleading at worst” (quoting Prof. Thomas Lehman, Wesleyan University). Forgot to mention: Prof. Lehman has taken money from the payday lending industry. (“This Opinion Brought to You By” Business Week, Jan. 30, 2006).

On CRL’s “Financial Quicksand” report: “[a] Federal Reserve report…concluded CRL’s research was both flawed and costly to low-income consumers.” Forgot to mention: The front page of this working paper by a Federal Reserve staff economist states “the views expressed in this paper are those of the authors and not necessarily reflective of views at the Federal Reserve.”

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Self-Help would be subject to the same regulations proposed by CRL. As stated previously, Self-Help already follows the lending standards advocated by CRL, including offering responsible, affordable subprime mortgage loans and limited overdraft lines of credit. Falsely, CR League has charged that CRL pushed to exempt credit unions from the court-supervised modification bills that are being considered in Congress. NOT TRUE. Because many credit unions didn’t make many subprime or “nontraditional” mortgage loans that were the subject of the bill, the impact of this legislation on credit unions may be minimal. However, the majority of Self-Help Credit Union’s home loans meet the bill’s definition of subprime, and hence would be covered by the bankruptcy bill.

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CRL advocates for changing the bankruptcy code because it will help an estimated 600,000 struggling families keep their homes. CR League recently charged—falsely—that CRL is supporting public policy reforms for financial gain. This charge is based on a grant CRL received from the investment management firm Paulson & Co., Inc. However, NONE of the grant funds have been or will be used by CRL for lobbying. Over the years, Self-Help and CRL have received grant support from numerous banks and mortgage companies, some of whom oppose the proposed bankruptcy reform bill. CR League would be hard-pressed to find any Self-Help funder who believes it has been able to influence CRL policy goals. 5

More specifically, the grant from Paulson & Co. will provide funding and training to organizations that help homeowners negotiate alternatives to foreclosure. The majority of the funds will be grants to support direct legal assistance to homeowners across the country to fight foreclosure, predatory lenders and abusive loan servicers. It will do this primarily by providing money directly to nonprofit groups—in fact, over $6 million in specific awards were announced in early March 2008.18 The remaining funds will be allocated to similar efforts over the next two years. With 43% of recent subprime loans projected to be lost to foreclosure absent policy intervention,19 providing legal assistance to borrowers facing foreclosure and changing the bankruptcy code so that judges can restructure loans to make them affordable as a last alternative to foreclosure20 are both urgently needed to help struggling families keep their homes. Self-Help worked to stop foreclosure and to reform the bankruptcy code before it had any association with Paulson & Co.; at the same time Self-Help appreciates the latter’s support of legal efforts to prevent foreclosure and save an estimated 5,000 or more homes as a result. Fact #4: Self-Help Credit Union looks different than its “peer” credit unions because its primary focus is providing home-ownership loans to low-income and under-served families. 21 •

For over 20 years, Self-Help’s loan delinquency rates have been higher than its credit union peers because it makes home loans to low-income borrowers with few cash savings. These borrowers fall behind on their loans more frequently than borrowers overall when faced with an income disruption caused by divorce, illness or temporary job loss, but they remain committed to keeping their homes. In addition, Self-Help works very closely with borrowers to help them through these difficulties. As a result, very few Self-Help loans end in borrowers defaulting and losing their homes through foreclosure, a result reflected in Self-Help Credit Union’s low loss rates of 0.26% per year over the past 5 years.

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Self-Help’s members have higher loan balances because its loans are predominantly home mortgages, rather than auto loans and other small loans offered by most credit unions.

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Self-Help has a higher return on assets than its peers because of lower expenses and a higher portfolio concentration of loans versus investments. Self-Help expenses are lower because it has fewer retail branches, fewer staff members, and its executives' salaries are significantly lower than its peers.22 In addition, Self-Help deploys a higher percentage of its assets into loans, which earn more than investments.

Conclusion CR League’s recent “swift boat” attack on Self-Help is yet another effort by the payday lending industry to halt Self-Help’s advocacy against predatory 400% APR loans. As in 2005, this attack is based on false claims and flawed facts; not unlike payday lenders’ calling their product a “benefit” to consumers.

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Leslie Crutchfield and Heather McLeod Grant. Forces for Good: The Six Practices of High-Impact Nonprofits. p.2 (2008) 2 Forbes’ Failed Probe. Columbia Journalism Review (March 12, 2008). Available at http://www.cjr.org/the_audit/forbess_contortions.php?page=all 3 Among other things, Former House Majority Leader Dick Armey, chairman of FreedomWorks, was a top recipient of payday industry political donations when he was in Congress. Some who made generous donations were top executives of payday lender Rent-A-Center Inc. In 2004, the year after he joined FreedomWorks, Armey was named to the board of Rent-A-Center Inc., where he served as a director until September, 2006. FreedomWorks president Matt Kibbe is husband of CR League head Terry Kibbe and, over the last twelve months, he has lobbied Virginia legislators to keep payday lending legal in the state. CR League also shares a mailing address with FreedomWorks. 4 Fight Between North Carolina Credit Union and Payday Lenders Gets Uglier, Aims For A Bigger Audience. Credit Union Times (November 2005). Available at http://www.cutimes.com/article.php?article=7743 5 Frank Norton. Report criticizes credit union. The News & Observer (November 4, 2005). Also, Badge of Honor (editorial). The News & Observer (November 8, 2005). 6 Stephane Fitch and Matthew Woolsey. Subprime's Mr. Clean. Forbes (March 10, 2008). Available at http://www.forbes.com/forbes/2008/0310/042b.html 7 Columbia Journalism Review, at note 2. 8 Eric Halperin and Peter Smith, Out of Balance: Consumers pay $17.5 billion per year Center for Responsible Lending (July 2007). Available at http://www.responsiblelending.org/pdfs/out-of-balance-report-7-10final.pdf 9 Uriah King, Leslie Parrish, Ozlem Tanik. Financial Quicksand: Payday Lending Sinks Borrowers In Debt Center for Responsible Lending (November 2006). Available at http://www.responsiblelending.org/issues/payday/reports/page.jsp?itemID=31101660 10 North Carolina Consumers After Payday Lending: Attitudes and Experiences with Credit Options. University of North Carolina Center for Community Capital. (November 2007). Available at http://www.ccc.unc.edu/documents/NC_After_Payday.pdf 11 Credit Union Times at note 4 and News and Observer at note 5. 12 Self-Help staff in DC and California also receive “locality pay adjustments” to reflect the difference in living expenses between these locations and North Carolina. 13 Jeffrey Birnbaum. Housing Crisis Hits Its Own: Mortgage Bankers Group Faced With Tougher Terms. Washington Post (April 6, 2008) 14 CRL research reports can be found at http://www.responsiblelending.org/research/ 15 Board of Governors of the Federal Reserve System Press Release January 9, 2008. Available at http://www.federalreserve.gov/newsevents/press/other/20080109a.htm 16 John Farris and Christopher A. Richardson The Geography of Subprime Mortgage Prepayment Penalty Patterns Housing Policy Debate Vol 15 Issue 3. (2004). Wei Li and Keith S. Ernst., Do State Predatory Lending Laws Work? A Panel Analysis of Market Reforms. Housing Policy Debate Vol 18, Issue 2 (2006). Debbie Gruenstein Bocian, Keith S. Ernst and Wei Li Race, Ethnicity and Subprime Home Loan Pricing. Journal of Economics and Business Vol. 60, Issue 1-2 (2008). 17 CRL Research Advisory Council member names and biographies available at http://www.responsiblelending.org/about/rac.html 18 Helping Americans Keep Their Homes: Institute Announces $6.5 million in Legal-Aid Grants to Help Families Caught in the Foreclosure Crisis. Institute for Foreclosure Legal Assistance press release (March 6, 2008) available at http://www.responsiblelending.org/press/releases/institute-announces-6-5-million-in-legal-aidgrants.html 19 Fitch Ratings estimates total losses of 25.8% of original balance in Q4 2006 loans placed in MBS they rated, and that loss severity will be at 60%, which means that 43% of the loans are projected to be lost to foreclosure (25.8/60). Glenn Costello, Update on U.S. RMBS: Performance, Expectations, Criteria, Fitch Ratings, p. 17-18 (not dated, distributed week of February 25, 2008). According to Michael Bykhovsky, president of Applied Analytics, an estimated 40% of outstanding subprime mortgage loans could go into default over the next three years (press briefing at the Mortgage Bankers Association's National Mortgage Servicing Conference, February 27, 2008). 20 Other supporters of this change include Jack Kemp, former Republican HUD Secretary; Lawrence Summers, former Democratic Treasury Secretary; Lewis Ranieri, who pioneered securitization; prominent economists such as Mark Zandi, chief economist of Moody’s Economy.com; Robert Shiller, Professor of Economics and Finance at Yale University, and Karl Case, Professor of Economics at Wellesley College (Professors Case and Shiller are principals in creating the Standard & Poor’s Case-Shiller® Home Price Index). The New York

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Times, USA Today and other editorial boards support it as well. See http://www.responsiblelending.org/issues/mortgage/prevent-600000-foreclosures.html. 21 Self-Help “peer” credit unions have $100-$500 million in assets. Financial statements available at National Credit Union Administration website http://www.ncua.gov/data/foia/foia.html. 22 Source: HR Value Group, LLC, 2006 Southeastern Region Credit Union Compensation and Benefits Survey (435 credit unions in the Southeast replied to the survey). Selected representative salaries appear below. This survey was conducted approximately two years ago; Self-Help’s salary cap in 2006 was $63,000. CEO: 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $151,426 ($146,700 median) COO (or equivalent): 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $97,671 ($98,455 median) CFO (or equivalent): 2006 average salary for credit unions in the Southeast with $200-500mm in assets: $78,248 ($75,541 median)

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