CFPB: Richard Cordray Release New PDL Study
Published: Tue, 03/25/14
presentation today in Nashville, TN. To sum it up, "HORRIBLE!"
Prepared Remarks of Richard Cordray
Director of the Consumer Financial Protection Bureau
Payday Field Hearing Nashville, Tennessee March 25, 2014
Today we are releasing a research study on payday loans. We chose
this part of the country to release this study because of the
prevalence of payday lenders both here and in many of the neighboring
states.
*********************** Prefer to read online? ********************
http://paydayloanindustryblog.com/?p=2502
PLEASE forward this email to EVERYONE!
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Congress has charged the Consumer Financial Protection Bureau with
the dual responsibility for assuring that consumers have access to
financial services and making sure that the markets for those services
are fair, transparent, and competitive. In particular, we envision
a marketplace where both consumers and honest businesses can benefit
from reliable small-credit lending.
Payday loans were developed to provide small loans to consumers to
meet a short-term need. Consumers who take out these loans are usually
required to repay them from their next paycheck. Payday lending as
we know it originated in the 1980s and 1990s, when a number of state
legislatures were persuaded to create a special exemption to their
state usury laws that established a new framework for small-dollar
lending. Under the protective umbrella of that new exemption,
payday lending has spread and grown rapidly over the past two decades.
Today, payday loans are readily available online and in many states
through storefronts as well. According to reports from industry
analysts, about 12 million American adults are currently choosing to
borrow money through payday loans.
For consumers
in a pinch, getting the cash they need can seem worth it at any cost. Many
consumers would never dream of paying an annual percentage rate of 400 percent
on a credit card or any other type of loan, but they might do it for a payday
loan where it feels like they can get in and out of the loan very quickly.
People often are responding to circumstances they view as presenting an
emergency that requires immediate access to money.
In fact, the
core payday loan product was designed and justified as being expressly intended
for short-term emergency use. But our study today again confirms that payday
loans are leading many consumers into longer-term, expensive debt burdens. Our
research confirms that too many borrowers get caught up in the debt traps these
products can become. The stress of having to re-borrow the same dollars
after already paying substantial fees is a heavy yoke that impairs a consumer's
financial freedom.
Today's
report is based on data drawn from a 12-month period that represents more than
12 million storefront payday loans. It is a continuation of the work we did
last year in our report on payday loans and deposit advance products, which was
one of the most comprehensive studies ever undertaken on this
market.
In last
year's report, we studied the number of loans that borrowers take out over the
course of the year and the length of time that borrowers are in debt over the
course of that year. We found that too often payday consumers are getting
caught in a revolving door of debt.
Today's study
builds on our prior research and digs deeper into payday loans with even more
analysis behind the numbers. We look at new payday loans and examine how often
borrowers roll over the loans or take out another loan within 14 days of paying
off the old loans. We did this because we consider these subsequent loans
really to be renewals that are part of the same "loan sequence." What we mean
is that the subsequent loans are prompted by a single need for money - that is,
the follow-on loans are taken out to pay off the same initial debt for the
consumer. Maybe that consumer took out the loan to pay for a car repair. Or
maybe she took it out to pay for an unexpected trip to the hospital. Or maybe
she was just short some of the money needed to get by at the end of the month.
Whatever the reason, the loan sequence comprises all of the renewal loans that
the consumer took out to pay for the costs incurred from or made unaffordable by
that initial need.
Our study
today is the most in-depth analysis to date of this pattern. Another way of
stating the matter is that our central concern here is not with every payday
loan made to a consumer. Preserving access to small dollar loans does mean,
after all, that some such loans should be available. Our concern instead is
that all too often those loans lead to a perpetuating sequence. That is where
the consumer ends up being hurt rather than helped by this extremely high-cost
loan product. And it is well known that payday loans often lead to this
damaging result. Our report today further documents this concern in much
greater detail.
Our research
found that for about half of all initial payday loans - those that are not taken
out within 14 days of a prior loan - borrowers are able to repay the loan with
no more than one renewal. However, we also found that more than one in five
initial loans that are made result in loan sequences involving seven or more
loans. With a typical fee of 15 percent for each payday loan, consumers who
renew loans seven times or more will have paid more in fees alone than the
amount they borrowed in the original loan. For these people, the piling up of
fees eclipses the actual payday loan itself.
Moreover,
when we looked at 14-day windows in the states that apply cooling-off periods to
reduce the level of same-day renewals, the renewal rates are nearly identical to
states without these limitations. This renewing of loans can put consumers on a
slippery slope toward a debt trap in which they cannot get ahead of the money
they owe. And this tells us that even if state law precludes consumers from
taking out another payday loan immediately, the pressure of their circumstances
- now intensified by the heavy expense of the payday loan itself - tends to
force consumers to find their way back to the payday lender about as soon as the
law permits.
As for the
amounts that people are borrowing, we found that in four out of five loan
sequences in which borrowers renew the loan, they end up borrowing the same
amount or more, sometimes again and again. So because they rolled over their
loans, they ended up owing as much or more on their very last loan as the entire
amount they had borrowed initially. Tragically, these consumers find that they
are simply unable to make any progress in reducing the debt over
time.
Most telling,
the study found that four out of five payday loans are rolled over or renewed
within two weeks and that roughly half of all loans are made to borrowers in
loan sequences lasting ten or more loans in a row. From this finding, one could
readily conclude that the business model of the payday industry depends on
people becoming stuck in these loans for the long term, since almost half their
business comes from people who are basically paying high-cost rent on the amount
of their original loan.
These are not
just abstract numbers. They reflect the circumstances of people across the
United States who are running into trouble with payday loans. Several thousand
have submitted complaints to the Consumer Bureau because they have gotten caught
in these spider webs of debt. Since we started taking payday loan complaints in
November of 2013, just four months ago, we have already heard from thousands of
consumers across the country.
Some
consumers have told us about circumstances in which a payday loan proved
beneficial to them. But others have told us a very different
story.
Take Lisa
from Pennsylvania, who submitted a complaint to us after taking out a payday
loan. Lisa told us that she lost her job at a local hospital and went to a
payday lender to help pay her rent. She meant to take out the loan for a short
amount of time. She thought she would be able to get in and out of the loan
quickly. But she ended up rolling it over. She also took out a second loan to
pay for the first loan. In total, she says, she took out $800. Today, despite
having paid back more than $1,400, she still has not entirely paid off the
loans.
Now she is
trying to turn her life around. She is taking classes, holding down two jobs,
and moving in with her parents to save money. Yet the struggle continues. "It
caught me totally off guard," she said. "I got stuck in a cycle." Her
information eventually got sold to a debt collector and now she tells us she is
getting called five times a day.
Lisa's story
is all too common. She thought she could get in and out of the loan but ended
up spiraling downward in debt. She slipped on the steep slope and just kept on
sliding.
Our study
also looked at payday borrowers who are paid on a monthly basis. It found that
many payday borrowers fall into this category, such as elderly Americans or
disability recipients on fixed incomes. A fair number of them remained in debt
for the entire year of our study, living for all practical purposes with a
high-cost lien against their everyday life.
Indeed, of
the payday borrowers who were receiving monthly payments, one out of five
borrowed money in every single month of the year. These borrowers, which
includes those who receive Supplemental Security Income and Social Security
Disability or retirement benefits, are thus in serious danger of ensnaring
themselves in a debt trap when they take out a payday loan. This fact is of
great concern to us.
Evelyn, an
81-year-old woman from Texas, had to deal with this very situation. Evelyn told
us she had never taken out a payday loan in her life until she needed to pay for
her dying daughter's cancer medicine. She saw an ad on TV and on a Saturday
morning went down to her local payday storefront to take out $380. She was
hoping her daughter would get well and pay back the money herself. But the
cancer took away her daughter just six months later. Evelyn, on a fixed income
that combined her widow's pension and Social Security checks, tried to pay back
the loan bit by bit. But every time she hit her due date at the beginning of
the month, she had to renew the loan because she did not have the full amount
plus the new fees. As the many months passed, Evelyn's outstanding balance grew
to be more than $700.
These kinds
of stories are heartbreaking and they are happening all across the country, even
in states that have adopted mandatory cooling off periods and other
regulations. They demand that we pay serious attention to the human
consequences of the payday loan market.
In January
2012, we added payday lenders to our program of supervising financial
institutions. It was, in fact, one of the first things we did after I took over
as the Director of the Consumer Bureau. Almost immediately, we decided to hold
a field hearing in Birmingham, Alabama, so that we could hear directly from
stakeholders about the costs and the benefits of actual consumer experience with
this kind of small dollar loan. And we began to undertake our first closer
study of these issues, which led to last year's report.
Through our
supervisory work, we have become concerned about situations we have found where
payday lenders have inhibited borrowers from using company payment plans that
are intended to assist them when they have trouble repaying their outstanding
loans. Moreover, we have found that some lenders use the electronic payment
system in ways that pose risks to consumers. These practices can hinder
consumers from getting out of debt or can leave them unable to prioritize the
payment of their various debts in ways that would leave them better
off.
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.
These activities include using false threats, disclosing debts to third parties,
making repeated phone calls, and continuing to call borrowers after being
requested to stop. 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.
The
fundamental problem is that too many borrowers cannot afford the debt they are
taking on or at least cannot afford the size of the payments required by a
payday loan. In the end, consumers are at risk of using these products in ways
that go beyond their intended purpose. This concerns us at the Consumer Bureau,
and it should concern anyone who is focused on the payday market, because
financial products that trigger a cycle of debt are likely to disrupt the
precarious balance of consumers' financial lives, leaving them worse
off.
We have also
taken further steps to protect consumers in this space. In an enforcement
action against Cash America International, we ordered one of the largest
short-term, small-dollar lenders in the country to refund consumers for
robo-signing court documents in debt collection lawsuits. We ordered Cash
America to pay up to $14 million in refunds to consumers and levied an
additional $5 million fine both for these violations and for obstructing our
examination team by destroying records in advance of our arrival.
We also sued a
company named CashCall, along with its owner, its subsidiary, and its affiliate,
for collecting money that consumers did not even owe. We believe the defendants
engaged in unfair, deceptive, and abusive practices in violation of the federal
consumer financial laws, including illegally debiting consumer checking accounts
for loans that were void. The Bureau's investigation showed that these
high-cost loans violated either licensing requirements or interest-rate caps -
or both - in at least eight states, which had the legal effect of either voiding
or nullifying the loans.
Last fall, we
released new guidelines to our examiners who are supervising payday lenders on
how to identify consumer harm and risks related to Military Lending Act
violations. And for the past year, we have been working directly with the
Department of Defense and other agencies to revise the regulations implementing
the Military Lending Act, with the goal of fulfilling the congressional
objective of ensuring more consistent protection of our servicemembers in the
consumer financial marketplace.
In sum, we
are taking a variety of actions in this space that address serious harms to
consumers. And as we learn more about this industry, we will remain vigilant to
address other concerns as they are identified.
The purpose
of all this additional outreach, research and analysis on these issues is to
help us figure out the right approach to protect consumers in the marketplace
for payday loans. We want to ensure they will have access to a small loan
market that is fair, transparent, and competitive.
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. 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. But we also need to recognize that loan products which routinely lead
consumers into debt traps should have no place in their lives. Thank
you.
Here's a link to the CFPB Payday Loan Report:
http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf