The Consumer Financial Protection Bureau (CFPB) Tuesday released a research report on payday lending and presented some of the findings at a field hearing in Nashville. CFPB Director Richard Cordray noted at the hearing that his group is in the “late stages” of formulating new rules for short-term loans.
The extensive report released today is based on data from a 12-month period with more than 12 million storefront payday loans. It is a continuation of the work in last year’s CFPB report on Payday Loans and Deposit Advance Products, one of the most comprehensive studies ever undertaken on the market.
Researchers found that a primary driver of the cost of payday loans is that consumers may roll over the loans or engage in re-borrowing within a short window of time after repaying their first loan. The study looks at not only the initial loans but also loans taken out within 14 days of paying off the old loans; it considers these subsequent loans to be renewals and part of the same “loan sequence.”
By focusing on payday loan renewals, the study found that a large share of consumers end up in cycles of repeated borrowing and incur significant costs over time. Specifically, the study found:
- Four out of five payday loans are rolled over or renewed
- Three out of five payday loans are made to borrowers whose fee expenses exceed amount borrowed
- One out of five new payday loans end up costing the borrower more than the amount borrowed
- Four out of five payday borrowers either default or renew a payday loan over the course of a year
- Four out of five payday borrowers who renew end up borrowing the same amount or more
- One out of five payday borrowers on monthly benefits trapped in debt
At a field hearing held Tuesday at the Country Music Hall of Fame in Nashville, Cordray hinted that new rule proposals for the payday lending market could be coming soon.
“As we look ahead to our next steps, I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market,” said Cordray in prepared remarks. “We continue to grapple with all aspects of these issues. We have always acknowledged that the American consumer has shown a clear and steady demand for small-dollar credit products, which can be helpful for the consumers who use them on an occasional basis and can manage to repay them without becoming mired in a prolonged and costly struggle. So we intend to make sure that consumers who can afford to take out small-dollar loans can get the credit they need without jeopardizing or undermining their financial futures.”
While the report did not specifically mention debt collection tactics used by either payday lenders or third party ARM firms, Cordray made extensive note of debt collection matters in his speech.
“Our examinations also show that a troubling number of these companies engage in collection activities that may be unfair or deceptive in one or more ways,” said Cordray. “The same is true for debt collectors that work for payday lenders and that may fail to honor the protections that are afforded to consumers through the Fair Debt Collection Practices Act. As we uncover these problems, we are taking actions that require firms to comply with the law by changing their practices and to make consumers whole for any harm they have suffered as a result of legal violations.”