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CFPB Should Shake a Leg on Payday Loan Rules

The Consumer Financial Protection Bureau took an important step toward ending payday lenders' predatory practices in March by releasing a proposed framework for regulating the industry. But the CFPB and director Richard Cordray have yet to take the next critical step: actually issuing regulations on the payday lending industry. With each day that passes without new rules, more Americans are falling prey to loans that may trap them in a cycle of debt. The CFPB should take action — and soon.

There's no denying the strong demand for payday loans in the American economy. More than half the nation's consumers (56%) have subprime credit scores, according to research from the Corporation for Enterprise Development, meaning they cannot qualify for affordable and safe credit. These consumers are more likely to resort to high-cost alternative services, such as payday loans, to meet every day financial needs. The CFED research found that one in five households relies on these alternative financial services.

Many of the people most vulnerable to payday and other predatory loans are low-income families, households of color and seniors on fixed incomes — people who already occupy a fragile position in the American economy. Payday lenders know the statistics favor their industry, which is why they aggressively market their product to those without access to affordable credit.

For households struggling to meet basic needs, a payday loan can seem like an attractive way to stay afloat until the next pay check. Unfortunately, research from the Pew Charitable Trusts found these loans are not as small or short-term as consumers anticipate. In a year-long period, the average payday loan borrower is indebted for five months, spending a total of $895 for what was initially a $375 loan.

What's more, Pew found that just 14% of payday borrowers were able to pay off the full loan within the standard two-week period. The CFPB's own research found that nearly half of payday borrowers take out 10 or more loans per year, paying fees on each loan rollover and new loan.

The CFPB's proposed framework would do much to rein in the industry's most abusive practices. It would prevent lenders rolling over the same loan multiple times, a practice all too common in an industry where interest rates average just under 400% APR. The framework also prevents mandatory check-holding, a practice in which lenders require the borrower to provide a post-dated check or written permission to automatically withdraw money from their bank account — regardless of whether they have the funds to cover it.

These reforms need to be implemented as soon as possible. With each day that passes, more and more low-income consumers will be stripped of their hard-earned cash and trapped in a cycle of debt and poverty. Consumers cannot continue waiting around for rules that would protect them from these predators, who meanwhile reap $46 billion in profits annually off the misfortune of struggling families.

Federal regulations would also help level the playing field for consumers who live in states with few, if any, controls over payday lending. Missouri, for example, allows lenders to charge interest rates of more than 1,900%. The District of Columbia and 17 states have regulations in place to protect consumers from payday loans, but most states lack the protections that consumers need and deserve.

But before the CFPB issues new regulations, it should incorporate a few additional changes. For one thing, it should explicitly address the problem of unscrupulous online lenders who violate state consumer protection laws by strengthening states' capacity to protect their citizens from predatory loans made online.

The CFPB also should go further to ensure that payday lenders determine a borrower's ability to repay loans. In the current proposal, the CFPB outlines two methods to protect short-term loan borrowers from falling into a cycle of long-term debt, allowing lenders to choose the method they prefer.

Unfortunately, only one of these methods requires lenders to underwrite for the ability to repay. The other allows lenders to skip the underwriting if they provide affordable repayment options that limit refinancing, re-borrowing and other risky features such as balloon payments.

It is standard practice in nearly all other forms of lending to determine a borrower's ability to repay. The same should hold true for small-dollar lending.

Many in the payday lending industry contend that federal regulations are unnecessary. But given the industry's track record, the need for such regulation is clear. It's time the CFPB took the strong steps needed to significantly change this country's approach to small-dollar lending and protect consumers from an industry that strips wealth from families and impinges economic mobility.

Andrea Levere is president of the Corporation for Enterprise Development.


(11) Comments



Comments (11)
Ms. Levere is exactly correct in her observation that millions of American households struggle to make ends meet, and therefore the demand for short-term credit is very real. However, what she is missing, and what too many regulators are also overlooking, is a realistic understanding of the need for and use of short-term credit products. She also urges the CFPB to “hurry up” their regulations, when in fact the agency – midway through the rulemaking process – has not yet performed the necessary research to determine how payday loans affect borrowers’ financial welfare. Without this crucial information, it is impossible for the CFPB to know whether, or in what circumstances, payday loans could harm consumers as Ms. Levere asserts.

Further, a number of recent studies and reports released by regulators and researchers present hard data that contradict the assertion of many critics who push for strict new rules. For example, in 2014 the CFPB released an analysis of the complaints it has directly received from consumers. The analysis revealed that less than one percent of the consumer complaints are related to payday loans. This amount is dwarfed by complaints related to mortgages, debt collection and credit cards, which make up more than two-thirds of the total volume. The CFPB’s complaint data is not an outlier. The data reflects the Federal Trade Commission’s recently reported complaint data from 2014, where payday loans made up less than one percent of the more than 2.5 million complaints collected. Two additional studies from researchers at Columbia University and Kennesaw State University indicate that use of payday loans enhances consumer welfare. This is the type of research the CFPB needs to replicate and rely on prior to crafting regulations.

As an industry, we support regulation (contrary to the author’s claim). But regulation must balance a number of factors, primarily consumer protection and access to credit. Care must be taken not to inhibit choice, while still providing protections that help consumers use credit products successfully.

Our country already faces a credit crunch, with more than 24 million underbanked households, according to the FDIC. Many of these households rely on payday loans because they are not served by the traditional banking system. In fact, more than 19 million households choose to use these loans each year for their credit needs.

In their haste to propose new regulations for payday loans, Ms. Levere and other critics are calling for the CFPB to abandon normal, administrative procedures and to short-circuit the rulemaking process. Such haste would only lead to unintended, harmful consequences and a regrettable rule. Moreover, the regulations they are advocating would further reduce choices for Americans who already lack access to the banking system. Payday loans represent an important source of credit for millions of Americans who live from paycheck to paycheck. Instead of limiting their options, we need to find ways to make sure they have a variety of different credit options available to them when they need them.

- From Dennis Shaul, chief executive officer for the Community Financial Services Association of America (CFSA).
Posted by Dennis Shaul | Tuesday, August 25 2015 at 6:19PM ET
Why is the CFPB completely ignoring the input from these businesses? They actually have a rigorous regimen of best practices--like any other financial industry--yet this bureau has chosen instead to create its own rules, unfounded on any known practices by short term lenders. Time and again, the bureau has testified that it's mission is to expand access to credit, but it's pretty clear that is not the case. They intend to shut these lenders down outright.
Posted by leegee | Thursday, August 20 2015 at 12:42AM ET
The consideration that continues to be conspicuously (or conveniently) absent in the discussion of short-term, small-dollar credit extensions is the role of savings. Consumers with some emergency savings are less likely to require payday advances or incur overdrafts. Sadly the artificially low interest rates produced by the Federal Reserve's nonsensical QE program have discouraged traditional family savings programs. So while traditional financial institutions charging overdraft fees at rates that may equate to APRs of 17,000% pay fractions of 1% on short-term savings accounts, many non-traditional financial providers that offer payday advances with rates that may equate to APRs of 400% offer virtual savings accounts that pay 5%. So the tunnel-vision of the CFPB and consumers activists on eliminating non-bank small-dollar lenders is likely to deny needy Americans from a valuable savings option, along with a convenient emergency credit option.
Posted by jim_wells | Monday, August 17 2015 at 2:51PM ET
There is an unintended consequence to all this. There are many people who do not qualify for loans at bank rates. And, those people are much more likely to need credit on short notice than a credit worthy individual. Their car breaks down, the electricity is about to be shut off, they need to travel out of town for a family emergency, etc., etc. Without overdraft privilege and payday lending programs, where do these people go? Do they simply not show up for work, live without electricity for a couple of weeks, ignore the needs of their family? If you shut down OD and Payday programs there will still be the same demand for emergency funds, but no one will be available to "legally" provide them in a profitable manner. Nature abhors a vacuum, so it is inevitable that someone will step forward to meet that need for cash... Unfortunately, that "someone" will not likely be as civilized as the current system. If new regs eliminate the payday/OD trade I think I'll start buying futures in brass knuckles, plaster of paris, crutches and gauze tape!!
Posted by Hambone | Monday, August 17 2015 at 1:19PM ET
Alabama has reached a similar conclusion. Imposing regulations designed to eliminate non-bank, short-term, small-dollar lenders without first providing a suitable alternative is irresponsible government and injures the very consumers who are supposedly being protected.
Posted by jim_wells | Saturday, August 15 2015 at 8:54AM ET
The CFPB should shake a leg on researching the many states that have already passed effective payday loan legislation that protects borrowers from the exact sort of abuses Ms. Levere describes. Believe it or not, consumer protection and access to credit can coexist in the payday lending space. Just ask Florida.
Posted by Brian L | Friday, August 14 2015 at 3:25PM ET
Research by both the Fed and CFPB has recognized that in lending terms, a $24 overdraft for three days assessed the median overdraft fee of $34 would carry a 17,000% APR. And unlike payday loan providers, banks can manipulate the timing of debits and credits to drive accounts into overdraft, and clear debits highest to lowest to maximize the number of overdraft and NSF fees that can be charged. Even more pernicious, with bank overdrafts, depositors are denied all of the protections required of all other lenders, including knowing when a debt is incurred, the exact amount of the debt and the cost of credit extension expressed as an APR. If banks were required to operate their short-term credit programs the same way as all other credit providers, consumers would know exactly which providers were fleecing them. Perhaps then banks would resume making small loans to depositors, the way they did when banking was a well-respected industry -- and the payday advance industry was much smaller.
Posted by jim_wells | Thursday, August 13 2015 at 5:02PM ET
If the mathematical true, compounded APR was revealed on a payday loan, it might encourage the borrower to reconsider. In Georgia the loan of $100 for 14 days at a payday loan office has published the current APR in the Truth in Lending act of 1968. On that loan there is a $10 fee (initiation or whatever) which makes the current, simple-interest APR calculated as (using Excel characters) (30/100)*(365/14)*100 which equals 782.14%. However the mathematically true method is the Compound method the rate for a unit period compounded (^) for the number of unit-periods in a year, (((((30/100) 1)^(365/14))-1)*100 which equals 93,368.65%. I think they would of an alternate.
Posted by afblairjr | Thursday, August 13 2015 at 4:16PM ET
Yep, no shortage of efforts to choke off non-bank providers of small-dollar loans. Sadly, far less efforts to provide alternatives that satisfy consumers' increasing demand for emergency credit. Even the FDIC couldn't get their supervised banks to to serve their depositors needs for small, short-term loans at lower cost.
Posted by jim_wells | Thursday, August 13 2015 at 1:40PM ET
Jim: see earlier comments on this topic. CFPB has studied overdraft and will also begin the rule making process on overdraft this year. In terms of research- it's not just CFPB that's concluded the payday and other high cost loans don't work as advertised and actually put most customers into a worse financial situation. See research by Pew, the CA Dept. of Biz Oversight, and others.

You might also be interested in reviewing the many settlements with these companies for the illegal practices they've engaged in with the customers they profess to care so much about: Whether it's Advance America's settlements in California (2009), North Carolina (2010), Pennsylvania (2015), Missouri (2010), or Arkansas (2009).

Or, Ace Cash Express' 2014 settlement. This is the settlement where regulators found the employee training manual on how to keep their customers stuck in the debt trap- really classy!

Not a pretty industry- the more people learn about the reality of how this product works, the more strongly they support stronger regulation of it. More than 95 editorials have been written against payday lending in the last year and a half from newspapers across the country.
Posted by California Reinvestment Coalition | Thursday, August 13 2015 at 12:33PM ET
The CFPB's problem is that even its own compromised research - criticized by supervised industries, professional researchers and the research professional association - shows the value of payday advances to millions of Americans whose banks and credit unions will gladly take their deposits, but steadfastly refuse to extend them small-dollar value, short-term loans. Additionally The Bureau may finally have realized that trying to eliminate the small credit offerings of non-banks whilst allowing banks and credit unions to continue gouging depositors with overdraft credit extensions would institutionalize hypocrisy and selective regulation at the federal level. Such inconvenient truths clearly put the Bureau at odds with the self-appointed consumer activists with whom it continues to curry favor.
Posted by jim_wells | Wednesday, August 12 2015 at 8:41PM ET
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