An advocate for reining in payday lending is using animation to drive home its message.
The typical consumer who takes out a $375 payday loan winds up paying $520 in fees on that original loan and spends five months a year in debt, according to a series of videos produced by The Pew Charitable Trusts.
The videos tell the story of a fictional borrower named Jennifer who falls behind on her rent. Jennifer cannot afford to repay her loan and keeps renewing it, according to Pew, which notes that 12 million Americans use payday loans every year.
The videos follow a series of research reports by the nonprofit organization that examine so-called small-dollar credit products such as payday and automobile title loans on borrowers. Payday loans are billed as short-term solutions for emergency use, but the reality is much different, Pew officials say.
"Not everyone has time to ready 110 pages, so we wanted to see if we could squeeze down the basics into two, two-minute videos to show what we found and correct misperceptions in the market," says Alex Horowitz, who manages research for Pew's payday lending project.
The latest push by Pew comes amid efforts by regulators to place new restrictions short-term, small-dollar loans, including deposit advances offered by banks. Several banks, including Wells Fargo (WFC), U.S. Bancorp (USB), Regions Financial (RF), Fifth Third Bancorp (FITB), BOK Financial (BOKF) and Guaranty Bank (GBNK), offer deposit advances.
In April the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued proposed guidelines for deposit-advance loans that would require banks to review a borrower's ability to repay a deposit advance loan and restrict them from offering more than one payday loan at a time and no more than one loan per monthly statement cycle.
Twenty-five states also have pending legislation that ties to payday lending, according to the National Conference of State Legislatures.
Pew is sending the videos and the rest of its research to consumer groups, legislators, regulators and others, as well as taking to Twitter and other social media with its message. "If someone's making a law in this area, it's important information to use," Horowitz says.
Much of the problem with repetitive high-cost loans can be traced to weak underwriting, according to Pew, which notes that lenders have little incentive to limit deposit advances so long as the lender can count on paychecks being deposited regularly into the borrower's checking account.
"Lenders have the ability to collect but the borrower may not have the ability to repay, which is why we see persistent re-borrowing," Horowitz says.
Pew's position mirrors the views of the OCC, which proposed in April that "repetitive deposit-advance borrowings indicate weak underwriting" and would be flagged by examiners.
Regulators say they recognize the need for short-term credit products but note the perils for cash-strapped borrowers. "Deposit-advance lending presents significant consumer protection and safety and soundness concerns, irrespective of whether the products are issued by a bank directly or by third parties," the OCC wrote in April.
For their part, banks say the proposal would add costs for borrowers while pushing them away from deposit advances to storefront or online payday lenders that offer fewer protections.
The OCC's guidance "would require banks to use traditional underwriting and, in addition, overlay a cash-flow analysis," the Consumer Bankers Association, a trade group representing retail banks, wrote in comments filed in May with the OCC. "Such analysis is not well suited to deposit advances and would increase the cost of offering the product."
But Pew's Horowitz disputes the notion that bank customers will turn to other payday products if regulators crack down on deposit advances. Horowitz points to a finding by the Consumer Financial Protection Bureau that 15% of eligible customers take deposit advances at the handful of banks that offer them. Other research shows that only 4% of adults use storefront payday loans, he says. That suggests that where banks offer deposit advances, customers use them but that where banks don't offer such loans, few people flock to storefronts, according to Pew.
"We don't see people shifting from one to another even though products may appear to economists to be substitutes," says Horowitz.