CRL president Mike Calhoun delivered the following testimony at the Consumer Financial Protection Bureau field hearing on payday loans in Richmond, VA on March 26, 2015.
Thank you for the opportunity to participate on today's panel. This is a critical hearing for the millions of working families who are snared in the debt trap of unaffordable loans.
The history of the regulation of payday lending takes us to the states. Payday loans were legalized only in relatively recent years and only in some states, as the result of payday lenders' pushing for an exception to a state's interest rate limit. The payday lending industry promoted the loan's 300- or 400% annual interest, along with direct access to borrowers' checking accounts or car title, on the premise that the loan was for an emergency, once-in-a-blue-moon situation, and was just a two-week or one-month loan. The data, as we'll look at in a minute, show conclusively that this is not how these loans have operated. As a result, the recent trend has been more states closing these exceptions. Today about a third of states don't permit high-cost payday lending.
So with that context, we turn to the data, which show that the fundamental model for these loans is anything but "once in a blue moon." It really is a debt trap. The Bureau's data show 75% of all payday loans are from borrowers with more than 10 loans per year, with those loans churned on a nearly continual basis. CRL's published research shows that the average payday borrower is in these purportedly two-week or one-month loans for seven months of the year, with the loan being flipped over and over.
This churn evidences the borrower's lack of ability to repay. Since the lender holds the borrower's check or ACH access, and the loan is due on the borrower's payday, most loans are collected. However, the borrower does not have enough money left for necessities like food and housing, and is forced into another loan.
Car title loans operate the same way, with huge harm to borrowers because they often lose their car – undercutting a borrower's ability to get to work and earn an income. Installment loans with direct access to the borrower's account also often operate in this same way, with built in flipping.
Lenders' determining the borrower's ability to repay without reborrowing is an essential principle of responsible lending. It is practiced and required in other contexts, like mortgage lending. It is especially important for payday loans since the normal incentive to underwrite is flipped on its head: again, these lenders hold direct access to the borrower's checking account, first-in line, so they will usually be repaid, and loan churning —which happens when the borrower cannot afford the loan—produces much of the lenders' revenue.
The Bureau's proposal notes it is considering providing "options" lenders can choose in lieu of determining ability to repay, for both short-term and longer-term loans. This approach would violate this fundamental, essential ability-to-repay principle and undercut the effectiveness of reform of this lending. Exemptions from determining ability-to-repay for what are some of the riskiest financial products available—and again, illegal in many states— are totally inappropriate. No loan with these features should ever be exempted from responsible underwriting. And indeed in the mortgage context, the Bureau recognized that a safe harbor was inappropriate for subprime mortgages; it should likewise refuse to sanction a lack of underwriting for these high-risk loans.
In conclusion, the financial prospects of millions of families have been derailed by abusive consumer loans, and effective reform of this market is essential.
As is clear here today, CFPB can have tremendous impact in protecting borrowers from dangerous loans. Other federal regulators play a role as well. And states continue to play a critical role. The trend in the states is for payday lenders to make, or seek authorization to start making, multi-payment payday loans. These can often function like a series of short-term, single payment payday loans with built-in flips. But payday lenders cannot even purport that the high rates are justified because they are just for a short-term emergency, since they are, even by their explicit terms, longer term loans. So it's critical that CFPB's rule address payday installment loans, and also that states remain vigilant in applying state usury limits to these loans.
For more information or to speak to a CRL expert about payday loans, please contact Catherine An at firstname.lastname@example.org or 408-348-0401.