Rollover Bans Don’t Stop Payday Trap

Payday industry’s support of false reform has preserved its predatory business model in state after state


Center for Responsible Lending
April 9, 2009

The federal debate on payday lending practices is heating up. A bill in the House, H.R. 1214, features measures intended to reform abusive payday lending but that have failed at the state level to curb loan flipping practices that trap the financially vulnerable. By contrast, Illinois Sen. Dick Durbin (S. 500) and California Rep. Jackie Speier (H.R. 1608) have introduced common-sense bills that would restore consumer protections by placing a 36 percent annual interest-rate cap on consumer loans. The Center for Responsible Lending supports S. 500 and H.R. 1608.

CRL’s research shows that rollover bans fail to stop payday lenders from trapping borrowers into back-to-back loans, which are simply rollovers by another name.

 

“When rollovers are banned, industry simply replaces them with back-to-back loan flips that continue to ensnare people in long-term debt carrying an annual percentage rate of 400 percent,” said CRL senior researcherLeslie Parrish. “Payday lenders know this and that’s why they support rollover bans.”

 

Veritec Solutions LLC, a company that sells enforcement tracking services to states that ban rollovers, yesterday challenged CRL’s assertion that such bans have been ineffective in reforming payday lending abuses. Veritec’s assertion that rollover bans stop loan extensions is beside the point, because back-to-back transactions allow payday lenders to practice the very same abuses.

 

Rollovers Versus Back-to-Back Transactions: A Distinction Without a Difference

 

State with rollover ban

 

State without rollover ban

Customer takes $300 payday loan

Customer takes $300 payday loan

Two weeks later, customer walks in payday loan store, pays back previous $300 loan and pays $45 fee

Two weeks later, customer walks in payday store, pays $45 renewal fee for same $300 loan

Payday lender gives borrower new two-week loan of $300

Payday lender extends same $300 loan another two weeks

$45 total net cost to customer every two weeks. Total credit extended: $300

$45 total net cost to customer every two weeks. Total credit extended: $300

 

A double-digit cap on annual interest rates, such as the 36 percent cap Sen. Durbin and Rep. Speier favor, is the only kind of measure that has effectively stopped abusive payday loan flipping. Fifteen states plus the District of Columbia have stopped it by imposing a cap in the 36-percent range, and Congress applied the cap in 2006 to protect military families nationally. A new CRL survey finds that over 70 percent of Americans support a cap of 36 percent or lower.

 

How do payday lenders get around rollover bans?

 

Payday lenders evade rollover bans by making another loan to the same borrower in a short period of time, often just as the borrower pays off his initial loan and before he’s left the payday store. A series of rollovers or a series of back-to-back loans is a legal distinction without a difference, except in name, for borrowers.

 

Many states have banned rollovers, a practice that nets payday lenders repeated interest payments of about $50 on a $300 loan, without ever reducing the principal the customer owes. But the average borrower ends up paying about $500 in interest on top of the original $300, whether or not rollovers are banned.

 

Veritec cites data showing borrowers pay off their loans within two days of the due date as evidence that states’ attempts to ban rollovers work. But, for the vast majority of Oklahoma borrowers who take out multiple loans a year, over half of subsequent payday transactions happen as soon as the previous loan is repaid, and 88 percent of these are originated before the typical borrower receives the next paycheck two weeks later. Data from Florida show a similar pattern. Veritec’s own data, obtained by CRL through a public-records request from state regulators in Florida and Oklahoma, show this to be the case.

 

Industry does not oppose rollover bans; they don’t slow loan flipping

 

The only provision in H.R. 1214 that the payday industry’s lobbying group, the Community Financial Services Association of America (CFSA), publicly opposes is one that would impose an interest-rate cap of 391 percent on the typical two-week loan. CFSA opposes any interest-rate cap.

 

The futility of rollover bans is epitomized by aNorth Carolinapayday borrower interviewed by CRL, who was flipped into new loans for five years by Advance America, one of the nation’s largest payday lenders and a CFSA member. AdvanceAmericadid not use rollovers; instead it closed out the loan and re-opened it with new documents on the day that the loan was due. The borrower was in payday debt for years without any rollovers at all.

 

Ninety percent of payday lending business is generated by borrowers with five or more loans per year. Nineteen states ban rollovers. Some other states limit rollovers to between one and six. But data from five of the states that limit rollovers—Colorado, Florida, Michigan, Oklahoma, and Washington—show no reduction in the payday lending industry’s dependence on repeat loans. Even in states with cooling-off periods between loans, like Florida and Oklahoma, which Veritec cites as places where rollover bans work, most repeat loans are made within a few days of the old loan, showing borrowers can’t make it to the next payday without re-borrowing. (See the CRL report, Springing the Debt Trap)

For more information contact: Kathleen Day 202-349-1871, kathleen.day@responsiblelending.org; Carol Hammerstein 919-313-8518, carol.hammerstein@responsiblelending.org; or Charlene Crowell 919-313-8523, charlene.crowell@responsiblelending.org. Or visit www.responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.