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New Report Finds CFPB Proposal Must Include Ability to Repay for All Payday Loans

Tuesday, March 31, 2015

A new report released today by the Center for Responsible Lending (CRL) finds a high percentage of payday loan borrowers experience a "visible" or "invisible" payday loan default while caught in the debt trap. The report finds that nearly half of all payday borrowers default within the first two years of their first loan; of the borrowers who default, nearly half did so within the first two payday loans they borrow.

The report comes only days after the Consumer Financial Protection Bureau (CFPB) announced a proposal to curtail payday lending abuses that includes a significant loophole: a provision that gives lenders the option to make some loans without doing any underwriting.

"This report shows a high default rate on payday loans even though lenders are first in line to be paid—a clear sign that a borrower is unable to escape the debt trap once lured in by an initial payday loan," said Susanna Montezemolo, a senior policy researcher at CRL and one of the authors of the report. "This is a clear sign that a strong ability to repay standard should apply to every payday loan a lender makes. "

High Levels of Visible Borrower Defaults, Even with Direct Access to Borrower's Accounts

The report defines visible defaults as occurring when a borrower bounces a check, post-dated for their next payday, written to a payday lender. The report finds that 39% of borrowers experience a visible default within one year of taking out their first payday loan and 46% experience one within two years. This high visible default rate is especially concerning given that these loans are due on a borrower's payday, when they should have the most money to pay them back, and it indicates that they are unable to repay the loan without being forced to reborrow to cover essential expenses.

Once a payday borrower has a visible default, they face aggressive debt-collection tactics from payday lenders. As such, the report finds that, even though the borrower didn't have enough money to cover the loan on their payday, two-thirds of invisible defaulters ultimately pay in full.

"Invisible" Defaults – Overdrafting on the Same Day as Payday Loan Payments are Made – Impose Great Harm on Many More Borrowers

The report defines invisible defaults as occurring when the check written to the payday lender goes through but results in an overdraft fee—masking the true default rate—because the borrower did not truly have an ability to repay the loan. One-third of all borrowers experience at least one invisible default in which their account is overdrawn on the same day as a payday loan payment.

Overdraft and non-sufficient funds fees make triple-digit interest rate loans even more expensive for consumers, potentially doubling or tripling the cost of the loan on which the borrower defaults. ?

"Some poker players have a tendency to give away their hand with a 'tell' like blinking or looking around the table," Montezemolo said. "That there is no meaningful underwriting on payday loans is also a tell. Payday lenders misleadingly market their loans as a quick fix, but 75% of their fees are accounted for by borrowers who take out more than ten loans a year. A borrower who takes out this many repeat loans in a year is clearly being extended a loan they cannot afford. The CFPB should protect them and close the loophole in its proposal by adopting an ability to repay standard that applies to all loans. This ounce of prevention would be worth a pound of cure for the people who have seen the worst of the debt trap."

CRL has long researched predatory payday lending, publishing reports on the devastating economic impact of payday lending and possible policy solutions to address the harm. Across the country, the average payday loan interest rate is 391%. Earlier CRL research found that the typical borrower takes out ten payday loans in a year, usually in rapid succession, and ultimately pays over $450 in interest to borrow $350. Seventy-five percent of payday lending fees are accounted for by borrowers, firmly ensnared by the predatory loan debt trap, who take out more than ten loans a year. Eighty percent of all payday loans are taken out within two weeks of having paid off another payday loan. (For more information, see: CRL's Payday Loan Quick Facts: Debt Trap by Design)

There is a simple, widely accepted definition of a good loan: A good loan is a loan that can be paid back in full and on time without causing the borrower to reborrow, pay late fees, or have difficulty paying for household necessities like food an?d utilities. Given the well-documented harm of payday loans, the report recommends that the CFPB:

  • Close the loophole in its proposal allowing loans that are poorly, or not at all, underwritten;
  • Require payday lenders to determine a borrower's ability to repay any payday loan without reborrowing, including consideration of income and expenses;
  • Not sanction any series of repeat loans or rollovers of borrowers caught in the debt trap;
  • Establish a limit only allowing 90 days of payday loan indebtedness in a one-year period, consistent with the FDIC's guidelines.

In addition to calling on CFPB to close the loophole included in its proposal, the report reiterates CRL's previous call for Congress to enact a 36% interest rate cap, similar to what it enacted for active-duty military and their families in the Military Lending Act, and for federal regulators to fully enforce violations of the law by payday lenders. Individual states also have the power to enact rate caps, which CRL supports.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Andrew High at Andrew.High@responsiblelending.org or 919-313-8533.