The Other Shoe Drops on Payday Lenders

As it turns out, consumer advocates might have underestimated the impact of payday loans on consumers. We have written pretty extensively about the debt trap or cycle of borrowing that short-term, high-cost loans have on consumers. We are now getting real data and first impressions are that it is worse than we thought. The good news is that federal regulators are poised to take action.

The recent, incredibly detailed report by the Consumer Financial Protection Bureau (CFPB) revealed that the average consumer takes out 11 loans per year, paying $574 in fees (not including the principle balance). A quarter of borrowers paid more than $700 in fees. The argument that emergencies arise and people need short-term access to credit just doesn’t hold water with this latest data. Check out their infographic illustrating their findings. We blogged earlier about Pew Charitable Trust’s research that found recurring expenses accounted for the vast majority of payday borrowing. So, if someone is drowning…do you throw them a life preserver or a brick?

The next step after data analysis is action and the Washington Post is reporting that the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) will be issuing regulations on bank payday loans or direct-deposit advances. Bank payday loans are problematic for all the reasons that storefront loans are troubling but also because they squeeze in between state usury laws on small dollar loans. Included in this guidance, we are hoping to see mandatory “cooling-off” periods between advances, disclosed APRs, and what the heck, some underwriting standards that take into account the ability to repay. This is the beginning of what could be a very hot summer for payday lenders.

Author:

David Rothstein is research fellow in New America's Asset Building program. He is also a researcher at Policy Matters Ohio and project director for the Ohio CASH Coalition. There, David researches and advocates on asset building, consumer protection, tax and housing issues.