CRL and other allied organizations are pleased to submit the following comments on payday lending abuses in response to the Consumer Financial Protection Bureau's request after its January field hearing in Birmingham, Alabama. CRL and the other organizations appreciate the chance to comment on the debt trap inherent to payday lending, and are grateful for the supervisory guidance on payday lending that the Bureau has issued since the Birmingham event.
The comment letter analyzes research results to demonstrate the following points:
- Payday loans are structured to create a long-term debt trap. Although payday loans are marketed as a way for borrowers to take on short-term debt to cover emergencies between paychecks,[i] the reality is in fact very different. The product's structure—lack of underwriting, high fees, short-term due date, single balloon payment, and having access to a borrower's checking account as collateral—results in most borrowers having no choice but to take out more loans to pay off the initial loan. In fact, some lenders offer no-cost loans to new borrowers knowing that even with no fees charged on the first loan, they can count on most borrowers needing to take on additional (full-cost) loans to pay back the original fee-free loan.
- Over 75 percent of payday loan volume is because of churn—borrowers having to take out additional loans to pay off the original debt. This debunks the industry's argument that the large annual loan payday loan volume—estimated to be $29.8 billion for storefront payday and $14.3 billion for Internet payday in 2012 [ii]—is evidence that there is a strong demand for payday lending. Loan volume does not represent true demand but rather is a reflection of trapped customers.
- Extended payment plans are not an adequate solution. The industry often points to extended payment plans as more evidence that payday loans do not create a debt trap.[iii] The truth is that the economic incentives of the payday loan business model are stacked against widespread utilization of these extended payment plans, and data reveal that in fact very few eligible customers are ever placed into one.
- Payday loans result in long lasting financial harm . The debt trap and loan churn inherent to payday lending creates great borrower harm. Nearly 50 percent of borrowers default on their payday loans, triggering more fees and placing their bank accounts at risk. These borrowers face potential court action, wage garnishment, or having their debt sold to a collection agency. Payday loan use is associated with higher rates of bank account closures, delinquency on other debts, or even bankruptcy.
- Bank payday lending and internet payday lending cause the same harms as their storefront counterparts. Payday lending leads to long-term indebtedness and harms borrowers regardless of whether borrowers receive them from storefront lenders, banks, or online.
- Payday lenders target communities of color. For example, payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos compared with white neighborhoods. In California alone, they drain $247 million in fees from communities of color.
- There are a wide range of options for consumers to bridge a budget gap without creating a spiraling debt trap. Payday lenders like to claim that low-income families have no options other than payday loans. This is simply not true. Low-income consumers report taking advantage of affordable small-dollar loans available in the marketplace or non-credit other options, such as pursuing payment plans with creditors, emergency assistance programs, and budgeting to eliminate unnecessary expenses. Payday loans push these safer options further out of reach.
Research from the University of North Carolina supports the notion that the debt trap of payday lending creates so many long-term problems that borrowers are better off without having access to these abusive loans.[iv] The study, which reviewed the impact of North Carolina's rate cap that effectively eliminated storefront payday lending in the state, found that the absence of payday lending has had no significant impact on the availability of credit.[v] Moreover, it has made helped more households than it has harmed.[vi] Nearly nine out of ten North Carolina households characterize payday lending as a "bad thing," and this overwhelming proportion holds true for households that have experienced financial hardship or that have previously taken out a payday loan.[vii]
Given the structural problems with payday loans and the long-term negative consequences payday borrowers face, we urge the Bureau to use the full panoply of tools available to it—including supervision, enforcement, and rulemaking—to end the debt trap caused by these loans.
[i] For example, the Community Financial Services Association of America (CFSA) website states: "A payday advance should be used responsibly and for only the purpose for which it is intended: To solve temporary cash-flow problems by bridging the gap between paydays. A payday advance is designed to provide short-term financial assistance. It is not meant to be a long-term solution." See http://cfsaa.com/what-is-a-payday-advance/is-a-payday-advance-appropriate-for-you.aspx (viewed on 4/18/12).
[ii] Stephens Inc. industry report, 3/12/12.
[iii] For example, the CFSA website touts: "As provided by CFSA's best practices, a customer who cannot pay back a loan when it is due has the option of entering into an Extended Payment Plan (EPP). This service allows the loan to be repaid over a period of additional weeks. CFSA member companies provide this option to customers for any reason and at no additional cost." See http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (viewed on 4/18/12).
[iv] University of North Carolina Center for Community Capital (for the North Carolina Commissioner of Banks), North Carolina Consumers After Payday Lending: Attitudes and Experiences with Credit Options, November 2007, available at: http://www.ccc.unc.edu/documents/NC_After_Payday.pdf.