OAKLAND, CALIF. – California’s Department of Financial Protection and Innovation (DFPI) this week released a report revealing that the state’s payday lenders made fewer than 6.1 million loans with a value of $1.68 billion in 2020, which represents a 40 percent decline overall and a 30 percent decline in customers from 2019.
The decrease can be attributed to several factors, including stimulus checks issued by the federal government, local moratoriums on payments and loan forbearances during the COVID-19 pandemic. The decline is consistent with trends in other states and other forms of consumer lending during the pandemic.
Center for Responsible Lending Director of California Policy Marisabel Torres issued the following statement:
While the decrease in payday lending is encouraging, it may also be temporary. As housing relief expires and stimulus funds wane, we expect the volume to increase as people find themselves in situations the same as or worse than pre-pandemic. With an average annual percentage rate of 361 percent on these types of loans, it won’t take long for borrowers 一 particularly low-income borrowers 一 to land in financial peril.
The debt trap model with triple digit interest rates and repeat reborrowing hasn’t changed. What’s more, payday lenders continued draining hundreds of millions of dollars, mostly from low-income borrowers in 2020. About two-thirds of those millions came from people with more than seven payday loans during the year— showing the model isn’t driven primarily by use for occasional emergencies but by keeping people in cycles of triple digit debt.
To mitigate these perils, we urge the reinstatement of the Consumer Financial Protection Bureau’s 2017 rule, which established specific underwriting requirements for short term payday and car title loans and would have required a lender to determine whether a borrower could repay the loan while still meeting basic living expenses and major financial obligations. Abandoning the Ability-to-Repay provision has allowed payday lenders to continue to financially drain consumers of billions of dollars in fees.
In addition to reinstating the 2017 rule, we also advocate for the state of California to join 18 states and the District of Columbia in capping rates on small dollar loans to 36% or less. Moreover, as people take out early wage access loans in the same small dollar range, it is important for DFPI to release consistent data on the true cost of these products, to better understand whether we are replacing one debt trap with another.
CRL found these additional concerns in the report:
- Low-income Californians still paid millions of dollars in fees and interest. Nearly half of borrowers had incomes of less than $30,000 and of those 30% had incomes of $20,000 or less, and about 62% licensees reported serving customers who received government assistance.
- Despite decreased lending, consumers throughout the state continue to be negatively impacted by payday lending, which is a proven debt trap. Subsequent loans by the same borrower accounted for 69 percent of payday loans in 2020 and 78 percent of the aggregate dollar amount, according to the DFPI report. More than half (55 percent) were made the same day the previous transaction ended, and 21 percent were made one to seven days after the previous loan. Additionally, of the $250.8 million in fees on payday loans, $164.7 million, or 66 percent, came from borrowers who made seven or more transactions during the year.
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