Report: Subprime lending giant’s add-on “loan protections” put borrowers at risk

Leon Martinez never expected to fall prey to a sucker loan.

“You read about it. You hear about it happening to people. And you kinda think they deserve it, right?” he says.

His cycle of debt started the way many people’s do. A few years ago, he needed to take time off work because of an emergency in his family, but didn’t want to fall behind on his rent. So the 38-year-old nursing assistant from Lakewood borrowed about $4,500 from Springleaf, now known as OneMain, the nation’s largest subprime lender.

Several months into the loan, he borrowed another $1,200 or so in what he didn’t realize was a second loan with a second set of fees. He says he also didn’t realize that he had been paying all along for three loan insurance policies  he wasn’t aware he’d agreed to. He defaulted on that “renewed loan.” By the time OneMain sued him, won a court judgment and finished garnishing his paychecks this spring, he says he paid about three times the amount of his original loan.

Martinez realizes that plenty of people will blame him for not having saved money for an emergency. And for not reading OneMain’s fine print carefully. And for ignoring the age-old admonishment, caveat emptor: buyer beware.

“I know. I messed up,” he admits.

Yet that admission doesn’t ease the ire he has for OneMain, other lenders like it, and state officials whom he says allow companies to prey on Coloradans in financial trouble.

“I never used to follow politics or be involved in these policy things. It was always just me, myself and I. But the more I find out, the more depressed I get,” he says. “Sometimes I feel like the whole system is set up to keep the people at the bottom at the bottom. It doesn’t seem right that laws are set up so that people who have money just make things worse for people who don’t.”

Martinez is one of thousands of Coloradans who’ve become far more tightly entangled with subprime lenders than they expected when they borrowed money. What sets him apart is simply that he’s willing to talk about it publicly.

Subprime installment loans cover amounts higher than payday loans but lower than home mortgages or refinances. Nationally, the average amount is about $6,000, with a repayment period of three to six years and an average annual interest rate of about 26 percent. Rates in Colorado are slightly lower.

Consumers with low credit scores that disqualify them from prime interest-rate loans often seek subprime loans to buy cars or pay off credit card debts. Some borrow out of more urgent needs such as bailing a family member out of jail or paying for a funeral.

The Indiana-based OneMain – which operates 1,800 branches in 44 states – is among many companies that cater to low-income consumers who are in financial binds. In Colorado, it’s by far the biggest player in the subprime lending sector. The company has called special attention to itself here by trying to bend state regulatory policies to its favor.

During the 2015 and 2016 legislative sessions, when interest rates were near record lows, OneMain sought state lawmakers’ approval to increase Colorado’s blended interest rate structure. Its lobbyists said the company needed to hike its rates to meet its operating costs and to expand lending in what it called Colorado’s “financial deserts.” They argued that residents here have an urgent need for OneMain’s type of services.

“On face value, that just sounded completely wrong. It felt like a money grab to me,” says Michelle Webster, manager of research and policy analysis at The Colorado Center for Law & Policy.

The Denver-based watchdog group took a close look at OneMain’s lending practices, which Webster concluded “can be deceptively expensive for borrowers.” “If OneMain has its way, Coloradans will pay even more to borrow,” reads her report, “Paying More to Borrow: Subprime Lender Thrives While Colorado Consumers Struggle,” released this month.

OneMain derides the report as being full of misrepresentations.

“Some, I think, are unintended and others, I think, it’s not clear,” company Executive Vice President John Anderson tells The Colorado Independent. “When you actually start parsing what the study says, there are a lot of inaccuracies, which make you wonder about the integrity of the work that was done.”

The report is based on the center’s review of nearly 200 collection cases filed by OneMain against delinquent borrowers in the city and county of Denver. It found that 75 percent of those loans included expensive fees for loan insurance policies and other add-ons that purport to protect borrowers in case they lose their jobs, become disabled or die.

Webster and her team found that insurance premium payments are rolled into the cost of loans, plus interest, amounting to an average 18 percent – or $1,200 – increase in what borrowers owed. The credit insurance policies are sold by companies that happen to be subsidiaries of OneMain, which also receives commission on the premiums.

According to the report, subsidiaries Merit Life Insurance and Yosemite Insurance Company have weak records when it comes to paying consumers for their claims. Those records are based on their “loss ratios” – total claims paid as a percent of earned premiums. in 2016, Merit’s loss ratios for credit life policies and disability insurance were 47 percent and 42 percent, respectively, and Yosemite’s loss ratio for unemployment and property insurance coverage was lower – 14 percent.

The standard loss ratio for credit insurance should be at least 60 percent, according to the National Association of Insurance Commissioners. Consumer advocacy groups say it should be closer to 80 percent.

The report says these “high-priced, low-value” add-on policies “are optional in name but predatory in nature” because borrowers aren’t always aware they’re buying them. What’s more, it asserts, is that the insurance policies mainly minimize the risk of default for OneMain, not the borrowers who buy them.

In this context, Webster points out, calling the add-ons “loan protection products” is misleading. They are, instead, “a cash cow,” she says.

Nearly half of the Denver default cases the center examined were renewals of prior loans that were rolled over into new loans. The report alleges that, in doing so, OneMain engages in a deceptive practice known as “default masking.” More than half of the Denver borrowers who defaulted on loans had their wages garnished by OneMain, and 43 percent filed for bankruptcy, typically after the company filed against them in court, the report found.

Nationally, OneMain borrowers have complained that they declined loan insurance add-ons only to have them added anyway. Some have said they agreed to buy the insurance policies without having been given documentation of them or told how those policies would affect their monthly loan payments. And some, like Martinez, say they weren’t aware that by increasing their loan amounts mid-term they were actually taking on new loans with new terms.

OneMain’s Anderson, who serves as chief legal counsel, counters that the company takes deliberate and repeated steps to be transparent. He provided The Independent with examples of paperwork the company sends customers before and after they signing loan agreements indicating – he says in clear terms – that they have a choice of whether to buy the add-on policies at closing and then are given the option to cancel within 30 days of closing with a full refund.

“We pride ourselves in making sure that it’s sold as optional insurance. Borrowers are told that. This isn’t something that’s buried in a footnote in (an) agreement on page 40. These are separate papers they sign,” he says. “We make it very difficult that someone would not be aware that the insurance is optional.”

The Center for Law and Policy’s Webster doubts that OneMain’s agents don’t prod customers toward buying the add-ons. “You wouldn’t have a 75 percent rate of borrowers buying these insurance policies if there wasn’t some steering happening here.”

Anderson says customers are apt to forget they bought insurance policies, saying what they “may remember two or three years after they took the loan is not necessarily what they knew at the time of the loan.”

He objects to critics labeling OneMain as a “predatory lender,” saying that, before selling a loan, the company ensures that potential borrowers have sufficient disposable income to be able to afford a loan, and to afford a loan renewal.

“The study is misleading in characterizing what we do as masking defaults. We don’t participate in it and we object to being characterized as conducting our business that way. We won’t engage in that practice.”

He counters the report’s assertion that OneMain charges more than other banks for similar loans, naming companies he says charge “significantly” higher annual percentage rates. And he says there have been “zero” borrower complaints in Colorado about OneMain’s add-on insurance products, and notes that his company discloses that the insurance companies underwriting the policies it sells are its own subsidiaries.

“Whether (borrowers) fully appreciate that, it’s hard to say.”

Watchdogs urge potential borrowers to carefully read – and re-read – the fine print of any loans documents, and to read between the lines, as well. Despite the urgency for quick cash, they advise consumers to take their time and ask plenty of questions before signing.

Says Ellen Harnick of the Center for Responsible Lending, a nonprofit working to ensure fair lending practices nationwide: “The problem is that these loans end up being much more expensive than people think.”

That was the case with Sarah Boyd of Denver who in January 2015 took out a $2,100 loan with a nearly 31 percent interest rate to consolidate debt as she tried to launch a clothing business. She lost her job five months later. Unlike the companies backing her student loan and credit card, she’s galled that OneMain “wouldn’t work with me at all.”

“So that was pretty shitty,” says Boyd, now 28 and a drafter at an engineering firm who says she has spent two years paying down penalties and extra fees she likens to a noose around her neck.

“Warn people about doing business with OneMain,” she adds.

The Center for Law and Policy staff will meet next week with state Attorney General Cynthia Coffman’s office to discuss the report’s findings. Judging by the high rate of borrowers who buy OneMain’s insurance products, they’re particularly interested in learning if such purchases are, in fact, voluntary.

The center and other watchdog groups are looking into possible consumer protections such as requiring lenders to advise borrowers in writing that they don’t have to buy loan insurance and other add-ons, and requiring lenders to spell out in writing what borrowers’ monthly payments would be both with and without the extras. States without those type of consumer protections in place, the National Consumer Law Center concluded, are essentially giving lenders a way to circumvent rate caps and charge more for loans.

Coffman’s office hasn’t answered inquiries about its take on the center’s report and what, if any, consumer protections the Attorney General might support.

Had they been in place two years ago, Martinez says those types of regulations may have saved him money he otherwise could have put away for his daughter’s college education or for a family emergency like the one he didn’t want to discuss that led him to borrow from OneMain in the first place.

After months of wage garnishment, he finally managed to free himself from his debt to OneMain this spring. He recalls with relish the last phone call he made to the company  and what he told its agent.

“I called basically to get it off my chest, you know. So I told her, ‘There’s a special place in hell for people like you.’”

See related coverage of questionable lending and debt practices in Colorado. “CO lawmakers want to give consumers more protection against “zombie-debt” collectors” and “Veterans feel ripped off by Colorado for-profit college.”

Photo by Susan Greene.