The Cumulative Costs of Predatory Practices

Figure 4 illustrates the dollar impact of a depressed credit score. This hypothetical borrower would
pay $3,760 more on a new auto loan and almost $55,000 more on a mortgage over the life of the
loans at today’s interest rates as a result of the credit damage done by foreclosure. It is not unreasonable
for riskier borrowers to pay more for credit, but it is unreasonable when that risk is the result of
a predatory loan.
Figure 4: Borrower typically pays significantly more for credit following a foreclosure
Loan Assumptions
Effect of Foreclosure
Auto purchase
Home purchase
Amount financed $26,000 $172,000
Loan term (months) 48 360
Starting score 780 780
Post-foreclosure score 620–640 620–640
Increase in interest rate 6.5% 1.6%
Increase in interest paid $ 3,760 $ 54,034
Source: April 2015 calculation from MyFico.com calculator: http://www.myfico.com/myfico/creditcentral/loanrates.aspx
Credit information increasingly—and controversially—factors into non-lending decisions as well.
Products such as Experian’s SafeRent Tenant Score and The Landlord Protection Agency’s Tenant
Scorecard enable landlords to use credit information in leasing decisions. Some landlords establish a
credit score floor; potential renters with lower scores are turned away. Auto, homeowner, renter, and
life insurance can also be influenced by credit report information (Fremstad & Traub, 2011). In most
states, the use of credit profile information results in higher insurance rates for individuals with lower
scores, though some states—including Massachusetts, California, and Hawaii—have outlawed the
practice. Job-seekers may also have a harder time finding employment if they have blemished credit
reports. A Demos survey of low- and moderate-income Americans with credit card debt found that
one in seven job-seekers with blemished credit had been passed over for employment after a credit
check (Traub, 2013).
Opportunity Costs
Costs for families grow even greater if we consider what likely would have occurred had the borrower
received a responsible loan or not been pushed into default. For example, the majority of students at
for-profit, four-year colleges do not graduate and would have been better served by earning a degree
at a state institution. The opportunity cost for non-graduates is the lifetime income differential
between a non-graduate’s earnings income and the earnings of those with a four-year degree from a
public college.
The recent mortgage lending crisis offers some concrete data points from which to explore opportunity
costs. In the 2000s, millions of irresponsible subprime mortgages were made that eventually
ended in default and foreclosure. Although we cannot know the counterfactual outcome—i.e.,
what would have happened if the predatory mortgage loans of the 2000s had been made responsibly—the
existing evidence shows that products with sound underwriting and responsible features
made to subprime borrowers during the same time performed much better than the predatory
products peddled to similar borrowers.
For example, loans made to subprime borrowers in the Community Advantage Program (CAP)—
30-year, fixed-rate loans without risky features—performed much better than other subprime loans
14
The State of Lending in America & its Impact on U.S. Households