The State of Lending in America: Payday Loans


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Presentation to complement CRL's Payday Loan research published in the 2013 report "The State of Lending: Payday Loans."

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The State of Lending in America: Payday Loans

  1. 1. The State of Lending in America: Payday Loans Susanna Montezemolo Senior Policy Researcher Center for Responsible Lending 4 December 2013
  2. 2. Overview • The overall level of lending is shrinking because of decisive state and federal action. However, for those who receive payday loans, the consequences remain dire. Borrowers pay $3.4 billion in payday fees each year. • Payday lenders continue to be dependent on creating a long-term cycle of debt that leads to a cascade of financial consequences, despite codification of industry “best practices.”
  3. 3. Overview (Continued) • 22 states have rate caps that eliminate the debt trap or other reforms that limit the debt trap. Despite an aggressive push by payday lenders to reverse these laws, states are holding firm with broad public support, and borrowers are better off. • The states should continue to push for 36% APR caps where possible. • The CFPB should require underwriting, prohibit the requirement to hold a post-dated check or to provide electronic account access as a condition of receiving the loan, and put in place a 90 days of indebtedness limit for high-cost, short-term credit.
  4. 4. Repeat Borrowing Fuels Payday Lending (Even with “Best Practices” Codified ) % of loans to borrowers with 5+ loans/year % of loans to borrowers with 7+ loans/year % of loans to borrowers with 12+ loans/year Florida 92% 85% 63% Kentucky 93% 88% 70% Oklahoma 91% 84% 61% South Carolina 90% 82% 62% Average 91% 86% 65% 2006 Average (from "Financial Quicksand") 90% not available 62%
  5. 5. Current Industry Landscape • The number of storefront locations has declined from around 25,000 in 2006 to around16,000 today. • Borrowers pay $3.4 billion annual in payday loan fees, at least $2.6 billion of which is due to loan churn. • Payday lenders are able to maintain growth by charging higher fees and making larger loans in unrestricted markets.
  6. 6. Payday Loans Create a Long-Term Cycle of Debt for Borrowers • CFPB: Median loan size $350, total interest $458. Average borrower takes out ten loans per year and is indebted 199 days (55%) of the year. Two-thirds of borrowers receive seven or more loans in a year. • CRL Analysis of state regulator data finds an average of nine loans per year, paying back $504 for an initial loan averaging $346. • Total fees paid: $3.4 billion. • Most loans are taken out in rapid succession; 76% of fees ($2.6 billion) are the result of lenders churning borrowers every two weeks.
  7. 7. Effective State and Federal Action to Curb Payday Debt Trap • 22 states have implemented rate caps or other reforms to curb the debt trap since 2001. No new state has authorized payday loans since 2005. • Payday lenders have aggressively tried to reverse this trend. They have been unsuccessful because of broad opposition. • Voters have consistently supported ballot initiatives to impose rate caps on payday loans (e.g., OH, AZ, and MT). • States have been effective at enforcing their laws, particularly as federal regulators helped end evasion attempts, such as the “rent-a-bank” scheme.
  8. 8. Movement to Payday Installment Loans • In states with little-to-no regulation of installment loans—particularly those with no rate cap—some payday lenders have migrated to highcost installment loans (but not to the exclusion to the single-payment, two-week payday loan). • Payday lenders are pushing debt-trap payday installment proposals in states that have significant payday regulations • Some states specifically authorize payday installment loans • These payday-like installment loans are still structured as debt trap products.
  9. 9. Regulatory Action • Federal regulators have cracked down on bank payday lending:  The OCC and FDIC issued final guidance directing their banks to avoid payday lending.  The Federal Reserve Board issued a statement of guidance expressing concerns about bank payday products. (We still hope the Fed will join the OCC and FDIC in their guidance.)
  10. 10. Regulatory Action (Continued) • The CFPB is expected to issue rules that would likely cover all payday lenders, non-bank and bank. Earlier this year, it issued a white paper on payday loans. • The Federal Trade Commission issued an enforcement action applying the Truth in Lending Act and the Electronic Funds Transfer Act to online tribal lenders. • States have been effective at enforcing their laws.
  11. 11. Policy Recommendations • • • 36% APR limit (states, Congress) CFPB:  Prohibit requiring a post-dated check or electronic account access as a condition of receiving credit.  Underwriting: Assess ability to repay the loan and cover other expenses without having to take out another loan.  90 days of indebtedness limit for high-cost, shortterm credit. Vigorous enforcement from federal and state regulators.
  12. 12. Other Recent Research Papers • Lohrenz, 2013 (Insight Center) finds that the payday lending industry had a negative economic impact in 2011 of $774 million, resulting in the estimated loss of more than 14,000 jobs. U.S. households lost an additional $169 million as a result in increased bankruptcy filings resulting from payday loan usage, bringing the total loss to nearly $1 billion. • Kaufman, 2012 (Fed) examines the effects of various state regulatory approaches on payday lending, providing support for the contention that payday lenders charge the maximum they can in a state. For each $1 increase in the maximum fee allowed in the state, the actual price goes up by 75 cents. He also finds that increases in the maximum fee allowed and the maximum loan size are associated with a higher delinquency rate.
  13. 13. Other Recent Research Papers (Continued) • • McKernan/Ratcliffe/Kuehn, 2013 (Urban Institute) find that state payday lending prohibitions/price caps do not lead people to use other alternative financial services (AFS) products; i.e., they find no evidence of a substitution effect. Bhutta, 2013 (Fed) finds that payday loans do not have a statistically significant impact on credit scores, new delinquencies, or the likelihood of overdrawing credit lines. The author did not use a data set with actual payday loan usage, a key drawback of his approach. Other papers have found that payday loan usage is associated with negative financial outcomes, such as defaulting on credit card debt, filing for bankruptcy, incurring overdraft fees, and losing the bank account.