The small-dollar loans that generate long-lasting debt for consumers and cost them billions of dollars each year are drawing the active attention of legislators and regulators alike. On April 24, the Consumer Financial Protection Bureau released a white paper on payday loans made by storefronts and by banks. Despite years of bank efforts to portray themselves as anything but payday lenders, the CFPB strips them of that cover.
According to CFPB Director Richard Cordray, "What we found is there is not much difference from the consumer's perspective, between payday loans and deposit advance loans. They have similar purposes and, as it turns out, similar usage by consumers."
At the same time, three members of Congress – Congressional Black Caucus Members Elijah Cummings D-(MD) and John Conyers (D-Mich.) were joined by Oregon's Rep. Suzanne Bonamici in urging federal regulators to take actions on bank payday loans.
"We urge you to take meaningful joint regulatory action to ensure that no bank, regardless of its prudential regulator, traps borrowers in high-cost payday loans," the members said in a statement. "Our constituents, and consumers everywhere, deserve better from our nation's financial institutions."
The following day, two regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced new regulatory actions to address potential consumer risks associated with the products as well as the safety and soundness of operations. The two regulators' actions are very similar, focusing on a borrower's ability to repay while meeting ongoing expenses, safe and sound underwriting, and limiting the numbers of loans.
According to Thomas J. Curry, OCC Comptroller, "We have significant concerns regarding the misuse of deposit advance products."
OCC supervises all national banks and federal savings associations with combined assets of $10.1 trillion, representing 71 percent of total U.S. commercial banking assets, according to its most recent annual report.
Similarly, FDIC Chairman Martin J. Gruenberg said, "The proposed supervisory guidance released today reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers."
FDIC insures deposits in more than 7,000 banks and savings associations.
According to CFPB's findings these actions could benefit about 12 million households that borrow payday loans each year, a potential reduction in the $7 billion in annual fees that are generated by more than 18,200 payday storefronts across the country.
CFPB's report examined 15 million payday loans made during a 12-month period, covering more than 90 percent of the market. Both storefront and bank versions exposed consumers to the risk of being caught in a revolving door of debt. What was sold as a short-term bridge became an expensive, long-term loan. Risky loan structure, loose lending standards, sustained usage and accompanying high costs were cited as characteristics of both products.
According to the report, 75 percent of storefront payday lending revenue is derived from borrowers taking out 10 or more loans a year. For 68 percent of these borrowers, their annual income is $30,000 or less.
Among the findings:
Nearly one-in-four borrowers received government assistance or benefits such as Social Security, disability, unemployment or welfare benefits;
The average borrower took 11 loans in the 12-month period, paying $574 in fees for $392 in credit; and
Despite lender attempts to reject the use of an annual percentage rate (APR), a two-week loan with a $15 fee per $100 borrowed is actually a 391 percent APR.
On banks' deposit advance loans, CFPB also found that:
Borrowers usually had much lower average balances than other bank customers, suggesting a smaller financial cushion to cover unexpected shortfalls;
Nearly two-thirds of consumers also incurred additional fees such as overdraft or non-sufficient funds;
The annual percentage rate (APR) of interest was 304 percent; and
Most borrowers remained in debt for at least 149 days.
Commenting on these findings, Director Cordray said, "We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures."
Earlier this month and in an effort to heighten Capitol Hill awareness of payday lending's debt trap, Congressman Conyers convened a briefing that included representatives from the NAACP, Native Community Finance, Consumer Federation of America, Pew Charitable Trusts, and the Center for Responsible Lending.
Also this month, CRL and National People's Action delivered to regulators more than 150,000 petitions urging the officials to crack down on high-cost payday lending. Also part of the petition drive were CREDO and Green America and Americans for Financial Reform.
For more than a decade, payday lending has been a centerpiece of the Center for Responsible Lending's policy efforts. The new CFPB findings strengthen earlier independent research by CRL.
Commenting on CFPB's findings, Uriah King, CRL's vice-president of state policy, said, "This white paper affirms our long-standing critique of payday lending. The debt trap of payday loans is now official."
Charlene Crowell is a communications manager with the Center for Responsible Lending.