Research

The payday industry's "new" guidelines are already proven failures. Any reliance on them for legislative reforms will also fail. In states that have legislated these guidelines, the debt trap persists. Nearly two of every three loans still go to borrowers with twelve or more loans per year and less than one percent of transactions use the "mandatory" payment plan. The only proven solution to stop the payday debt trap is to enforce a state's two-digit usury cap.

Banks stand back as debits and ATM withdrawals cause high-cost overdrafts for their customers Rather than linking their customers' checking accounts to their savings or other resources to cover overdrafts, many banks and credit unions are automatically covering their customers' shortfalls with expensive short-term loans. More overdrafts are happening when customers swipe their debit card or make an ATM withdrawal than when they write a check. In these cases, banks can warn customers or merchants when they have insufficient funds—but most do not. They can also decline the transaction and save...

In a recent working paper, Donald Morgan, a researcher from the Federal Reserve Bank of New York, attempts to determine whether payday lending is predatory by comparing the welfare of households in states where payday lending is unlimited versus states where payday lending is illegal. After a comparative analysis, Morgan concludes that "unlimited" payday lending enhances welfare. However, Morgan's findings are flawed for three key reasons: The analysis contains fundamental errors in its characterization of which states allowed payday lending. Example: Morgan identifies North Carolina—which had...

A CRL study released in December 2006, revealed that millions of American households would lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. The "Losing Ground" study was the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL found that despite low interest rates and a favorable economic environment during the past several years, the subprime market was experiencing high foreclosure rates, and we projected that one out of five (19.4%) subprime loans issued during...

Executive Summary: Financial Quicksand New CRL study finds borrowers pay $4.2 billion every year in excessive payday lending fees Every year, payday lenders strip $4.2 billion in excessive fees from Americans who think they're getting a two-week loan and end up trapped in debt. This report finds that across the nation payday borrowers are paying more in interest, at annual rates of 400 percent, than the amount of the loan they originally borrowed. Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from...

In a working paper released last month, Morgan Rose, a researcher from the OCC, analyzes a set of subprime loans originated in Chicago to determine the impact of selected lending terms on the likelihood of foreclosure. The study finds that loans with prepayment penalties and balloon payments are 22 to 117 percent more likely to foreclose than those without such terms. However, after an extended analysis, the author concludes that the impact of those terms on foreclosure varies widely. He therefore advocates for regulatory tightening of underwriting and pricing practices, as opposed to...

For the first time in 2004, lenders were required to report information to the federal government concerning the annual percentage rate (APR) charged borrowers on higher-cost home loans. The same data, collected under the requirements of the Home Mortgage Disclosure Act (HMDA), also detail several aspects of the loan transaction and the identity of the borrower, including race, ethnicity, sex, and income. In this review, we both summarize and comment on a portion of the first report based on the new data that was written by Federal Reserve Board of Governors' researchers. In general, the...

Refund Anticipation Loans, or RALs, are an extremely popular means for taxpayers to access their refunds more quickly than waiting for a paper check or even direct deposit. The negative effects of these loans—including their cost and lack of consumer protections—are well documented. Many consumer advocates and community development professionals are rightfully concerned about the popularity of these products, but also recognize that they can be useful to some filers. Fortunately, free tax preparation sites across the country are working to design and deliver RALs that promote the long-term...

In August, 2004, a group of people representing free tax preparation programs, national organizations and consumer advocacy groups met in Baltimore to discuss Refund Anticipation Loans (RALs). The meeting was hosted by the Annie E. Casey Foundation, a major funder of Earned Income Tax Credit (EITC) outreach and free tax preparation for low-income working families. While the group represented a diversity of views, the overall sense of the attendees was that, attracted by the prospect of large tax refunds – mainly due to eligibility for the EITC -- tax preparers and financial institutions take...