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From Banking and Finance Law Daily, March 25, 2014

CFPB takes steps to target payday loan debt traps

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray announced that the bureau is in the “late stages” of considering how best to formulate rulemaking that would address needed reforms to the payday lending industry. While consumers have “shown a clear and steady demand for small-dollar products,” and such products can be of benefit to consumers on an occasional basis, there are many aspects of payday loans that are of concern to the bureau, Cordray said in remarks at a Payday Lending Field Hearing in Nashville, Tenn.

The bureau conducted a detailed study of the payday lending industry and found that four out of five payday loans are rolled over or renewed within 14 days. In a report issued by the CFPB’s Office of Financial Research (OFR), the bureau states that the majority of payday loans are made to borrowers who renew the loans to the point where the interest on a loan is greater than the amount of the original loan.

“We are concerned that too many borrowers slide into the debt traps that payday loans can become,” said CFPB Director Richard Cordray in a bureau release. “As we work to bring needed reforms to the payday market, we want to ensure consumers have access to small-dollar loans that help them get ahead, not push them farther behind.”

Payday loans defined. According to the bureau, payday loans, also known as cash advances or check loans, are used by borrowers to try to “bridge a cash flow shortgage” between paychecks. Generally the loans are expensive, small-dollar loans of $500 or less. Consumers who take out payday loans often do not have any other means of credit, the bureau said.

Data Point. The CFPB’s report, CFPB Data Point: Payday Lending, is the first in a series of publications by the OFR intended to provide an evidence-based view of consumer financial markets and consumer behaviors when interacting with those markets. The report presents the results of analyses of how consumers use payday loans. The OFR focuses on repeated borrowing by consumers after they take out an initial payday loan. Consumers may roll over the loans or re-borrow within a short period of time after repaying their first loan. The CFPB studied not only the initial loans but also loans taken out within 14 days of paying off the old loans. Cordray, in remarks at a payday lending field hearing, called the study “the most in-depth analysis to date of this pattern.”

Report highlights. Overall, the bureau’s study found that a large share of consumers end up in cycles of repeated borrowing, incurring significant costs over time. Specific findings include the following:

  • More than 80 percent of payday loans are rolled over or followed by a subsequent loan (renewed) within 14 days. Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without these limitations. The bureau said that it considers these subsequent loans to be renewals and part of the same “loan sequence.”

  • While many loan sequences end quickly, 15 percent of new loans are followed by a loan sequence at least 10 loans long. Half of all loans are in a sequence at least 10 loans long.

  • Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence. For more than 80 percent of the loan sequences that last for more than one loan, the last loan is the same size as, or larger than, the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.

  • Monthly borrowers are more likely to stay in debt for 11 months or longer. Among new borrowers—those who did not have a payday loan at the beginning of the year covered by the data—22 percent of borrowers who are paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.

  • Most payday borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days. Nearly half of new borrowers, 48 percent, have one loan sequence during the year. Of borrowers who neither renewed nor defaulted during the year, 60 percent took out only one loan.

Data. The bureau said that it obtained its data from a number of storefront payday lenders through its supervisory process. The data provide information on all payday loans extended by each lender over a period of at least 12 months. The dataset contains an anonymous customer ID that allows the CFPB to link all loans made to the same consumer by a given lender during the observed time period. The dataset used in the analysis of borrowing patterns includes information on more than 12 million loans in 30 states, and covers 12-month windows in 2011 and 2012.

Not abstract numbers. Cordray noted at the field hearing that the numbers presented in the report are not just “abstract numbers.” Rather, they reflect the large number of consumers who are “running into trouble with payday loans.” The bureau started taking payday loan complaints in November 2013, and Cordray said that since then the CFPB has received several thousand complaints about payday loans from consumers that “have gotten caught in these spider webs of debt.”

Bureau supervision. In January 2012, the bureau added payday lenders to its supervision program. Through the CFPB’s supervisory activities, the bureau became concerned about situations in which payday lenders have inhibited borrowers from using company payment plans intended to assist them when they are having difficulties repaying outstanding loans, Cordray said. The CFPB also found that some payday lenders use the electronic payment system in ways that pose risks to consumers, preventing them from getting out of debt or leaving them unable to prioritize debt in a way that would be of benefit to them.

CFPB examinations have discovered that a “troubling number” of payday lending companies engage in collection activities that may be unfair or deceptive, Cordray said. These activities include using false threats, disclosing debts to third parties, making repeated phone calls, and continuing to call borrowers after being requested to stop. The same is true for debt collectors who work for payday lenders and who “may fail to honor the protections that are afforded to consumers through the Fair Debt Collection Practices Act.”

CFPB actions. The bureau has taken steps to protect consumers who take out payday loans, Cordray said. The CFPB is requiring firms determined via bureau examinations to have incurred violations to comply by changing their practices and making consumers whole for any harm suffered. He noted CFPB enforcement actions taken against payday lending companies, including Cash America International and CashCall.

The CFPB also developed guidelines for its examiners who are supervising payday lenders on how to identify consumer harm and risks related to Military Lending Act violations. Cordray said that over the past year, the bureau has been working with the Department of Defense and other agencies to revise the regulations implementing the Military Lending Act to ensure more consistent protection of servicemembers.

The bureau’s next step is rulemaking, based on outreach, research, and analysis of issues associates with payday lending. Cordray said the bureau currently is determining the proper approach to take in its rulemaking so as to protect consumers in the payday lending market. “We want to ensure they will have access to a small loan market that is fair, transparent, and competitive,” he concluded.

Companies: Cash America International; CashCall.

MainStory: TopStory CFPB CrimesOffenses DebtCollection EnforcementActions Loans

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