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New CFPB Report Details Financial Harms Caused by Payday Lending

Wednesday, April 20, 2016
Diane Standaert
Robin Howarth

Today the Consumer Financial Protection Bureau (CFPB) released a new report that proves how high-cost fees on small-dollar loan create rather than resolve financial challenges for borrowers.

An 18-month analysis of loans made by more than 330 payday lenders found that half of all borrowers—nearly 10,000—were charged an average of $185 in bank penalties, hidden costs usually in the form of overdraft or nonsufficient fund fees – or both. Repeated attempts by lenders to collect failed 70 percent of the time, but racked up substantial additional fees nonetheless. Involuntary bank account closures for borrowers with failed payments were very common affecting 36 percent of all borrowers.

These new findings underscore the Center for Responsible Lending's independent findings from its 2015 report, Payday Mayday.

Unlike traditional bank and mortgage lenders, payday lenders require borrowers to post-date checks or approve direct electronic access to borrowers' bank accounts. Either option ensures that the lender will be the first to be fully paid, regardless of whether borrowers have enough funds remaining for basic living needs such as housing, utilities, food or other items.

In response and on behalf of the Center for Responsible Lending, Robin Howarth, Senior Researcher and Diane Standaert, Director of State Policy jointly commented.

"The report shows that payday lenders use their direct access to borrowers' accounts to make repeated withdrawal attempts, regardless of account balances," said Howarth. "These debits result in numerous, nonsufficient fund fees and other penalties such as bank overdraft charges on top of the already onerous interest rates assessed on the loans. Further, unlike other consumer loans, these lack standard underwriting practices that determine a borrower's ability to repay before loans are approved."

"Today's report confirms the need for a strong CFPB rule without loopholes to prevent abusive payday lending practices," said Standaert. "Rulemaking is CFPB's most effective and available way to prevent financial abuses that now keep millions of working people trapped in a vicious cycle of debt. As state coalitions continue to advocate the enactment of comprehensive rates of 36 percent on these loans, the CFPB can use its authority at the federal level to set the financial rules of the road. All of America – including the working poor – deserve financial fairness."

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For more information, or to arrange an interview with a CRL expert, please contact Charlene Crowell at charlene.crowell@responsiblelending.org or 919.313.8523