Last week, the Consumer Financial Protection Bureau (CFPB) focused on those little loans that come with triple-digit lending rates – payday loans.
The CFPB's public forum in Nashville coincided with the Bureau's release of a new research report. After analyzing 11 months of borrowing at 12 million storefront locations, CFPB's findings again confirm that the industry relies not on individual borrowers' ability to quickly repay, but on their inability to repay, resulting in individual borrowers taking out many loans each year.
In other words, the business model for payday lending is a debt trap. With numerous storefronts often concentrated in communities of color, many consumers are drawn in by convenient locations and promises of quick cash with no credit checks. All too often, borrowers discover that the terms of the small dollar loan cause even more financial stress and deepening debt.
Commenting on the Bureau's payday loan focus, Director Richard Cordray said, "Our concern is that all too often those loans lead to a perpetuating sequence. That is where the consumer ends up being hurt rather than helped by this extremely high-cost loan product."
Unlike most lenders, the payday industry needs and relies upon customers who cannot repay their loans. For every payday borrower who must renew a loan, the lender can then with each renewal charge more lucrative fees. In many cases, borrowers are repaying more in fees alone than they initially received from the loan.
Two additional key findings by CFPB:
* Four out of five payday loans are rolled over or 'renewed' within two weeks of when the borrower paid off a prior loan; and
* Over two-fifths of payday borrowers who were paid on a monthly basis – most of whom were public benefits recipients, such as those on Social Security – sought 11 loans in the 11-month study period.
Cordray's concern about the payday loan debt trap is also shared by the Center for Responsible Lending (CRL). In a recent guest column in Nashville's daily paper, Mike Calhoun, CRL President, reminded readers that this country has suffered enough from predatory lending.
"As it is now, predatory payday loans are weakening working families and eroding communities that are still struggling to recover from the bad lending of the recent past", said Calhoun.
CRL's earlier and independent research found that payday borrowers are annually charged $3.4 million in fees alone. The typical borrower takes out 10 payday loans in a year at interest rates averaging 391 percent over a year's time.
Across Tennessee and in Nashville, where CFPB convened the forum, a two-week payday loan carries an annual percentage rate of nearly 460 percent. CRL estimates that each year, Tennesseans pay $199 million in fees.
Tennessee is also emblematic of many of its neighboring states. The South has the highest concentration of payday loan stores and accounts for 60 percent of total payday lending fees.
That's the bad news. The good news is that no state has authorized payday lending since 2005. Twenty-two states, including the District of Columbia, ban or impose significant restrictions on high-cost payday lending. And in instances where state legislatures have not enacted payday reforms, a growing number of cities – including Austin, Birmingham and Dallas – have looked to curb payday lending through zoning ordinances.
Despite these consumer victories, much work remains to be done to address payday lending. CRL Legislative Counsel Oneshia Herring testified at the field hearing in Nashville. Noting existing protections afforded military members and their families, as well as payday's long-term cycle of debt, Herring urged CFPB to set new limits.
"While the CFPB cannot limit interest rates, it can and should limit the length of time lenders can keep borrowers in debt and require that lenders evaluate a borrower's ability to repay the loan," said Herring. "It is time to end these debt trap loans and promote fair and affordable small-dollar products that bring financial stability rather than financial agony."
There is hope that the days of unbridled payday lending are numbered. During the Nashville forum, Director Cordray made it known that a new rule on payday lending could come out in the near future.
Already, CFPB's track record of enforcement has improved transparency and fairness in consumer lending. In just three years, CFPB has served returned over $750 million to consumers who were victims of various violations of consumer protection laws and has assessed more than $40 million in related penalties.
As CRL's Calhoun has said, "We need to end the debt trap model to make more room for affordable and responsible loan products that both benefit lenders and leave their customers better, rather than worse, off."