May 23, 2017

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How Colorado’s largest subprime lender has raised the cost of borrowing

by | May 23, 2017

In the final frenzied days of the 2015 legislative session, legislators passed a bill raising interest rates on Colorado borrowers accessing certain types of credit. Policymakers were persuaded by the industry sponsor’s story line: an interest rate hike is needed to expand credit to Colorado borrowers and lenders need the increase to meet their growing operating costs.

The bill’s primary advocate was OneMain Financial, the largest subprime installment lender in the nation. With 1,800 branches in 44 states, OneMain is by far the biggest fish in Colorado’s subprime lending sector. The company offers loans to borrowers with subprime credit. OneMain loans average about $6,000 with a repayment period of 3 to 6 years and an average annual interest rate of around 26 percent.

These loans can be deceptively expensive for borrowers. And if OneMain has its way, Coloradans will pay even more to borrow. Advocacy groups led by the Bell Policy Center and joined by CCLP, successfully persuaded Gov. John Hickenlooper to veto the 2015 bill that would have increased costs on an average $6,000 loan by 38 percent. Undeterred, OneMain returned in the 2016 legislative session with a slightly retooled proposal to raise interest rates on Colorado borrowers. The bill passed the Senate but was quickly defeated in the House.

In recent years, OneMain has emerged as a subprime powerhouse. Part of that impressive growth is due to OneMain’s concerted strategy to push for legislation in state legislatures to raise costs on subprime borrowers—who are already paying some of the highest interest rates in the country outside of payday lending. Since 2012, at least 10 states have been persuaded to raise the costs on these loans at a time when interest rates are at historical lows.

To better understand the terms of these loans and the implications for Colorado borrowers, the Colorado Center on Law & Policy reviewed collection cases filed by OneMain against delinquent borrowers in Denver County Court.

Our findings reveal how, despite their failed legislative efforts to date, OneMain found another way to make Colorado borrowers pay more. OneMain loans are commonly padded with expensive, low-value credit insurance products sold by insurance companies owned by OneMain. The company receives a commission on the sale of the insurance, the premium payment is financed in the loan so they also collect interest on the payment and the credit insurance ultimately protects the lender from the risk of default, not the borrower.

Among the findings detailed in our new report, Paying More To Borrow:

  • Loans are padded with expensive insurance products. Three-quarters of the loans examined included expensive credit and non-credit insurance policies rolled into the loan amount. These borrowers saw the total cost of their loan raised on average by $1,200 or an 18 percent increase in the total loan cost.
  • High-cost, low-value insurance. OneMain owns the two insurance companies that write insurance policies for their borrowers. And the loss ratios for the policies sold by OneMain—the percent of premiums paid out in claims—falls well below industry standards.
  • Insurance that is voluntary in name but predatory in nature? Nearly 8 in 10 borrowers in Denver County Court collection cases agreeing to purchase this high-cost, low-value insurance, begs the question of how OneMain achieves such a high penetration rate if purchasing insurance was actually presented as a voluntary option. On average 2.3 insurance policies were sold for every loan made.
  • Repeat refinancing means repeat customers and more profits. Nearly half of the cases we examined included a prior loan with OneMain; three-quarters of those renewals included insurance products rolled into the loan balance increasing the amount financed by an average of $720. Nationally, about 60 percent of OneMain loans are renewals of existing loans, a practice referred to as “default masking.”
  • Default judgment often leads to wage garnishment and bankruptcy. Over half of the Denver County cases resulted in an order for wage garnishment. Colorado law does little to protect low-wage debtors from having to turn over a significant amount of their earnings for garnishment. Over 40 percent of borrowers filed for bankruptcy at some point and the vast majority of those bankruptcy filings occurred after the OneMain collection case was filed.

State lawmakers, regulators and consumer advocates must keep careful watch to ensure that consumers are not unwittingly paying for insurance products they don’t need and incurring debt they cannot pay.

– By Michelle Webster

Recent articles

HEALTH:
HEALTH FIRST COLORADO (MEDICAID)

To maintain health and well-being, people of all ages need access to quality health care that improves outcomes and reduces costs for the community. Health First Colorado, the state's Medicaid program, is public health insurance for low-income Coloradans who qualify. The program is funded jointly by a federal-state partnership and is administered by the Colorado Department of Health Care Policy & Financing.

Benefits of the program include behavioral health, dental services, emergency care, family planning services, hospitalization, laboratory services, maternity care, newborn care, outpatient care, prescription drugs, preventive and wellness services, primary care and rehabilitative services.

In tandem with the Affordable Care Act, Colorado expanded Medicaid eligibility in 2013 - providing hundreds of thousands of adults with incomes less than 133% FPL with health insurance for the first time increasing the health and economic well-being of these Coloradans. Most of the money for newly eligible Medicaid clients has been covered by the federal government, which will gradually decrease its contribution to 90% by 2020.

Other populations eligible for Medicaid include children, who qualify with income up to 142% FPL, pregnant women with household income under 195% FPL, and adults with dependent children with household income under 68% FPL.

Some analyses indicate that Colorado's investment in Medicaid will pay off in the long run by reducing spending on programs for the uninsured.

FOOD SECURITY:
SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM (SNAP)

Hunger, though often invisible, affects everyone. It impacts people's physical, mental and emotional health and can be a culprit of obesity, depression, acute and chronic illnesses and other preventable medical conditions. Hunger also hinders education and productivity, not only stunting a child's overall well-being and academic achievement, but consuming an adult's ability to be a focused, industrious member of society. Even those who have never worried about having enough food experience the ripple effects of hunger, which seeps into our communities and erodes our state's economy.

Community resources like the Supplemental Nutrition Assistance Program (SNAP), formerly known as Food Stamps, exist to ensure that families and individuals can purchase groceries, with the average benefit being about $1.40 per meal, per person.

Funding for SNAP comes from the USDA, but the administrative costs are split between local, state, and federal governments. Yet, the lack of investment in a strong, effective SNAP program impedes Colorado's progress in becoming the healthiest state in the nation and providing a better, brighter future for all. Indeed, Colorado ranks 44th in the nation for access to SNAP and lost out on more than $261 million in grocery sales due to a large access gap in SNAP enrollment.

See the Food Assistance (SNAP) Benefit Calculator to get an estimate of your eligibility for food benefits.

FOOD SECURITY:
SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS AND CHILDREN (WIC)

Every child deserves the nutritional resources needed to get a healthy start on life both inside and outside the mother's womb. In particular, good nutrition and health care is critical for establishing a strong foundation that could affect a child's future physical and mental health, academic achievement and economic productivity. Likewise, the inability to access good nutrition and health care endangers the very integrity of that foundation.

The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) provides federal grants to states for supplemental foods, health care referrals, and nutrition information for low-income pregnant, breastfeeding and non-breastfeeding postpartum women and to infants and children up to age five who are found to be at nutritional risk.

Research has shown that WIC has played an important role in improving birth outcomes and containing health care costs, resulting in longer pregnancies, fewer infant deaths, a greater likelihood of receiving prenatal care, improved infant-feeding practices, and immunization rates

Financial Security:
Colorado Works

In building a foundation for self-sufficiency, some Colorado families need some extra tools to ensure they can weather challenging financial circumstances and obtain basic resources to help them and their communities reach their potential.

Colorado Works is Colorado's Temporary Assistance for Needy Families (TANF) program and provides public assistance to families in need. The Colorado Works program is designed to assist participants in becoming self-sufficient by strengthening the economic and social stability of families. The program provides monthly cash assistance and support services to eligible Colorado families.

The program is primarily funded by a federal block grant to the state. Counties also contribute about 20% of the cost.

EARLY LEARNING:
COLORADO CHILD CARE ASSISTANCE PROGRAM (CCCAP)

Child care is a must for working families. Along with ensuring that parents can work or obtain job skills training to improve their families' economic security, studies show that quality child care improves children's academic performance, career development and health outcomes.

Yet despite these proven benefits, low-income families often struggle with the cost of child care. Colorado ranks among the top 10 most expensive states in the country for center-based child care. For families with an infant, full-time enrollment at a child care center cost an average of $15,140 a year-or about three-quarters of the total income of a family of three living at the Federal Poverty Level (FPL).

The Colorado Child Care Assistance Program (CCCAP) provides child care assistance to parents who are working, searching for employment or participating in training, and parents who are enrolled in the Colorado Works Program and need child care services to support their efforts toward self-sufficiency. Most of the money for CCCAP comes from the federal Child Care and Development Fund. Each county can set their own income eligibility limit as long as it is at or above 165% of the federal poverty level and does not exceed 85% of area median income.

Unfortunately, while the need is growing, only an estimated one-quarter of all eligible children in the state are served by CCCAP. Low reimbursement rates have also resulted in fewer providers willing to accept CCCAP subsidies.