Federal policymakers should make payday lenders structure their loans to be repaid over time, according to a report released Wednesday by the Pew Charitable Trusts.
The report urges the Consumer Financial Protection Bureau and other regulators to follow the lead of Colorado, which passed a law in 2010 requiring payday lenders to allow borrowers a minimum of six months to repay loans in installments.
Colorado lenders were permitted to require in-full, lump-sum payments due on the borrower's next payday between 1992 and August 2010. Large payments trap borrowers in a cycle of debt, according to critics of the practice, forcing them to either renew their loans for a smaller charge, thereby extending the length and total amount paid on the loan, or to immediately take out another loan to compensate for the lump sum.
The percentage of loans that are renewals or taken out the same day a previous loan is repaid fell from 61% to 31% after the law was enacted, according to data provided by the Colorado Attorney General for the years 2009 and 2011. The average annual amount borrowers spend on payday loans fell 42%, to $277, between 2009 and 2012.
Thirty-five states currently allow lenders to require lump-sum payments, according to the report.
"Payday loans fail to work as advertised," Nick Bourke, who directs Pew's payday lending research, said in a press release Thursday. "They far exceed borrowers' ability to repay, andby a 3-to-1 marginpayday loan users say they want more regulation of the product. All small loans must have affordable payments. Payday loans do not. Pew's research demonstrates effective ways to address this problem."
The report also argues that payday lenders should be required to cap borrowers' installment payments at a comparatively small percentage of their paychecks, spread out fees within the life of the loan and provide clear disclosure of periodic and total costs with loan offers. Policymakers should prevent or limit the use of postdated checks and automatic withdrawals from customers' bank accounts, according to the report.
The payday advance industry mounted swift objections to the report. Community Financial Services Association of America, a trade group, argued that the report ignores the wide availability of longer-term installment loans.
"CFSA members support providing more credit options to consumers and exploring new product innovations, including installment loans," Dennis Shaul, chief executive of trade group, said in a Wednesday press release. "But we do not agree with Pew's assertion that consumers would be better off with fewer credit options. Because there is no one-size-fits-all solution that meets the needs of every borrower, choice in the regulated short-term credit marketplace is a good thing for consumers."
Pew failed to research the impact of payday lending regulation in states other than Coloradoand did not conduct in-depth research into how the law change had impacted Colorado borrowers, said Advance America, a payday lending company, in a press release. [Pew disputed those criticisms the next day.]
Twelve million people use payday loans each year, according to the report, spending an average $520 in interest to borrow an average $375.