Subprime Lending:Quantifying the Texas Market

Prime, Subprime, and Manufactured Home Lender Shares of Total Loan Applications in

Texas

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100%

1999 2000 2001

P rime Subprime Manufactured Housing

Prime, Subprime, and Manufactured Home Lender Shares of Total Loan Applications in California, Florida, New

York, and Texas, 1999-2001

Subprime Lending:Quantifying the Texas Market

Prime, Subprime, and Manufactured Home Lender Shares of Total Loan Applications in Select Texas Metro Areas

2001

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Brownsville-Harlingen

El Paso Laredo McAllen-Edinberg-Mission

Texas

Prime Subprime Manufactured Housing

Subprime Lending:Quantifying the Texas Market

Census Data Cameron El Paso Hidalgo Webb Texas

Housing units, 2002 126,674 232,142 207,597 59,426 8,502,060

Home ownership rate, 2000 67.70% 63.60% 73.10% 65.70% 63.80%

Median value owner occupied housing unit, 2000 $53,000 $69,600 $52,400 $74,600 $82,500

Median household income, 1999 $26,155 $31,051 $24,863 $28,100 $39,927

Housing starts, 2002 3,917 3,710 7,477 1,805 165,027

Units not mortgaged 35.80%

Median monthly costs of units with a mortgage, 2000 $757 $798 $765 $899 $986

Data from Experian

Debt (avg non-mtg debt) 6996 8099 6996 7273 9348

Credit usage (avg use of cred limit) 26.4 26.3 26.4 26.9 25.3

Late payments (# accts past due at least 1 pmt) 1.2 0.93 1.2 1.82 1.19

Credit inquiries (# cred rpt requested by lenders within last 2 yrs) 2.67 3.35 2.67 2.13 2.66

Education:Predicting the future

Source: Steve H. Murdock, Texas State Data Center

Credit Scoring:Texas and the Nation

642

651

642

631

652

678

600

610

620

630

640

650

660

670

680

Cameron El Paso Hidalgo Webb Texas NationalAverage

Average Credit ScoresData from Experian

Information Asymmetry:Effects of Life Disruptions and Education at the Point of Need

Information Asymmetry:Importance of Understanding the Transaction

Subprime mortgage loans contain complex pricing structures and terms that are difficult for even the most financially astute borrowers to fully understand. As products become more complex, the imbalance of knowledge, or asymmetry of information, between well-informed lenders and brokers and less well-informed buyers and borrowers widens and the potential for abuse increases.

Key Concerns from consultative session Low-Income Families and Asset Building on the USMexico Border by the Latino Financial Issues Program supported by the LBJ School of Public Affairsand Annie B. Casey Foundation target:

Bicultural and bilingual content in outreach programs Building trust among the various stakeholders in remedying the lack of financial planning

knowledge and consumer behavior strategies among low-income Latino families Exposing low-income Latino families to governmental officials and agents to minimize the degree

of ‘authority’ intimidation and to ‘humanize’ the bureaucratic process Designing financial services programs and outreach efforts to promote a community based

‘ownership’ perspective; this implies that residents must experience ‘self-empowerment’ and ‘ownership’ when participating in financial planning and consumer behavior strategy programs

Inclusive participation of residents in programs and minimizing the degree of ‘autocratic’ interaction with governmental agencies and officials

Information Asymmetry:Focused Education is Effective Education

Office of Consumer Credit Commissioner involvement:

The agency’s mission includes a charge to educate consumers and creditors, thereby producing a fair, lawful, and healthy credit environment for social and economic prosperity in Texas

The agency’s education program has two primary goals: Equipping consumers with the necessary knowledge to use credit wisely Educating industry so that its members are better informed of their responsibilities under the law

Consumer education focuses on four primary populations: The elderly Low-income groups Students

It has been reported that college students receive 25 credit offers each semester College administrators claim to lose more students to credit card debt than academic failure

Recent Immigrants OCCC uses multiple methods to reach its target populations. These delivery mechanisms

include: The agency’s Web site Media outreach Participation in school classrooms, events, and school-sponsored functions Direct outreach at events sponsored by groups with links to the targeted populations Publications designed to address specific areas of concern or to connect with specific populations

Information Asymmetry:Focused Education is Effective Education

Development of model plain language contracts: The agency has developed model plain language contracts in English and Spansih for its licensees to use. The legalese in contracts has been replaced by consumer-friendly words and phrases. A before-and-after comparison of a traditional and plain language contract yields some impressive numbers. For example, the plain language version of the sample sentence has 40% fewer words and scores fourteen times better on the Flesch-Kincaid readability test. These model plain language contracts are currently only required of licensed lenders. It is possible the Legislature could take action to encourage use in the broader mortgage market.

Education philosophy: Education is most effective when provided relevant to an immediate need. For example, mortgage education will be most effective when provided to consumers just prior to their purchase of a home.

Office of Consumer Credit Commissioner involvement (continued)

Financial Literacy Education:Garnering Attention

Ace Cash Express recently distributed book covers containing financial literacy information to over 800,000 Texas school children. OCCC and Ace Cash Express worked together to develop the financial literacy content.

Financial Literacy Education:Garnering Attention

Ace Cash Express recently distributed book covers containing financial literacy information to over 800,000 Texas school children. OCCC and Ace Cash Express worked together to develop the financial literacy content.

Recently, Citigroup and the Citigroup Foundation announced a 10-year, $200 Million global financial education commitment, the formation of a new Office of Financial Education and a global initiative designed to encourage all 275,000 employees to devote time to support financial education and other charitable causes. Under the new initiative, employees may take a day off from work to volunteer.

The Texas Alliance of the Boys and Girls Club will partner with Citigroup in North Texas, Houston and San Antonio to provide Financial Education Curriculum programs in 44 Clubs for one year. Using Citigroup’s curriculum, staff will be trained by Citigroup volunteers. More than 4,000 youth from 3rd through 12th grades will be taught in these clubs with assistance from employee volunteers.

Household Financial Corporation made financial contributions to Vecinos Unidos, a Texas non-profit corporation created by the residents of West Dallas to develop affordable housing in inner city neighborhoods within the City of Dallas. In addition, working with organizations around the state, Household plans 9 Consumer Education workshops in Texas.

The Texas Financial Services Association reports that teachers in 38 states have registered to use MoneySKILL, a free, online personal finance curriculum from the American Financial Services Association Education Foundation (AFSAEF) that’s aimed at the millions of high school students who graduate each year without an understanding of credit cards, budgeting, insurance or other money management fundamentals.

Debt Management and Credit Counseling Industry:A Few Facts

Nationally, Americans owe almost $2 trillion in consumer debt, $728 billion of which involves credit cards or other revolving accounts

The number of bankruptcies has nearly doubled in the past ten years as has consumer debt, which now stands at record levels

Only ten years ago, there were about 200 credit counseling organizations throughout the country; by 2002, there were more than 1,000

Nearly all credit counseling organizations maintain some kind of nonprofit status

Between 2000 and 2003, 810 consumer credit organizations applied to the IRS for tax-exempt status under Section 501(c)(3)

Debt consolidation is one of the nation’s fastest growing—though still largely unregulated—industries

An estimated 9 million Americans have some kind of contact with a credit counseling agency each year

Financial Literacy: Strategies to Address Predatory Lending

Recommendations: An expanded public sector role could be helpful in increasing financial

literacy, disclosure and reporting requirements, as well as generally assisting consumers to better understand their options. Because loan pricing is not transparent and the market is heterogeneous, it is easy for consumers to become confused.

Expand regulatory oversight powers and enforcement of riskier lending pools.

Industry development of more standardized procedures and products that more efficiently and fairly assess and allocate credit.

Public/Private Partnership Pilot Program: A border city could be selected for the initiation of a pilot project where resources from both the public and private sector could be harnessed to develop and launch an education effort relevant to the needs of the community. Should the effort show demonstrable results at reaching community members with relevant education material, the program could then be expanded to meet the needs of other areas in the state.