A new policy brief released today by the Center for Responsible Lending provides a state-by-state snapshot showing predatory payday and car title lenders increasingly moving into installment loans. The lenders are continuing to offer unsafe loans with excessive interest rates, which are carefully designed to trap borrowers in a cycle of debt they cannot escape, and actively seeking to expand into new states. The report highlights that just because lenders are making an installment loan, it is no guarantee that it is a safe loan. The report makes recommendations to regulators and policymakers to protect against harmful debt trap lending.
"Whether we are talking about a payday loan, a car title loan or a high-cost installment loan, the fundamental harm is making a loan that a borrower cannot afford to repay," said Diane Standaert, State Policy Director at the Center for Responsible Lending. "While many states have acted to protect their people from predatory payday and car title loans, our report shows that abusive lenders see installment loans as a new front. Regulators and policymakers should beware."
According to CRL, payday and car title lenders were offering installment loans in 17 states in 2013. Today, they offer installment loans in 20 states. Installment loans are structured to have multiple payments stretched out over significantly longer periods of time than traditional single balloon payment payday or car title loans. Despite this difference, CRL documents that these loans have similar characteristics including: a lack of underwriting, access to a borrower’s bank account or car as security, and excessive fees that create a pattern of re-borrowing. While the borrower may be hounded by a debt collector or wage garnishment once they have defaulted on their loan, lenders often have collected more than they loaned in the first place after only a few payments.
The report also documents recent state-level legislative activity, showing that many states have rejected proposals to weaken their state laws by allowing the creation or expansion of dangerous installment loan products, including those structured as open-end lines of credit. States must continue to enact protections, such as a 36% or less interest rate cap, inclusive of all fees and finance charges.
The report comes as the federal Consumer Financial Protection Bureau (CFPB) is considering new rules to curtail abusive payday, car title and high-cost installment lending. CRL believes it is vital that the CFPB’s rules ensure lenders assess a borrower's ability to repay the loan without delaying or defaulting on their other expenses or creating a cycle of repeat refinancing. The report makes recommendations for policymakers and regulators (included below).
Resources & Recommendations
Example Unsafe Installment Loans
- Ace Cash Express in California: A $2,600 loan, with recurring payment authorization, due in 9 monthly payments of $593.65; on the 5th payment, the lender will have collected $2,968.25.
- CashNetUSA in Ohio: A $2,000 online loan with 15 bi-weekly payments of $256.18, on the 8th payment, the lender will have collected over $2,049.32
State policy makers should:
- Cap the cost of all loans at 36% annually or less, inclusive of all fees and finance charges, including add-on products, just as the U.S. Department of Defense has done for active duty military and their dependents.
- Prevent the expansion of high-cost open-end lines of credit and close loopholes exploited by lenders offering open-end credit.
- Prohibit the sale of credit insurance products in conjunction with consumer loans.
- Take enforcement action against lenders structuring their loans as multi-payment or installment loans to evade existing consumer protection laws.
The Consumer Financial Protection Bureau (which lacks statutory authority to impose an interest rate cap) should:
- Issue rules that require high-cost lenders to assess a borrower’s ability to repay considering a borrower's income and expenses.
- Use rulemaking and enforcement authority to prevent lenders form trapping borrowers into loans that are repeatedly refinanced, have payment schedules that hinder a borrower’s ability to pay off the loan, or have unreasonably high default rates.
- Take enforcement actions against lenders that engage in unfair, deceptive, and abusive installment lending practices.
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.