Key findings in report
• Payday lenders often submit multiple requests on one day, and some intentionally break them into chunks — submitting three $100 requests, for example, instead of one $300 request — in hopes that at least one will be fulfilled.
• Four out of five payday loans are rolled over or renewed: More than 80 percent of payday loans are rolled over or renewed within two weeks.
• Three out of five payday loans are made to borrowers whose fee expenses exceed amount borrowed: Over 60 percent of loans are made to borrowers in the course of loan sequences lasting seven or more loans in a row.
• One out of five new payday loans end up costing the borrower more than the amount borrowed: For 48 percent 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.
• Four out of five payday borrowers either default or renew a payday loan over the course of a year: Only 15 percent of borrowers repay all of their payday debts when due without re-borrowing within 14 days; 20 percent default on a loan at some point; and 64 percent renew at least one loan one or more times.
Source: Consumer Financial Protection Bureau
Payday lenders can require borrowers to give them direct electronic access to their checking accounts, ensuring that they are paid before borrowers have a chance to pay rent or buy food.
A new report from the Consumer Financial Protection Bureau outlines how harmful that and other short-term lending practices can be.
When short-term lenders tap the accounts of low-income borrowers, that can lead to overdraft charges or even closed accounts, Richard Cordray, CFPB director, said in a conference call.
Borrowers can be left scrambling, trying to open new accounts or resorting to expensive check-cashing and bill-paying services, Cordray said.
“Getting booted from the banking system can have far-reaching repercussions for consumers, leading to a downward spiral that costs them even more money,” he said.
The bureau’s 18-month analysis of loans made by more than 330 payday lenders found that half of borrowers — almost 10,000 — were charged an average of $185 in bank penalties, which the CFPB called “hidden costs.”
Pat Crowley, spokesman for the Ohio Consumer Lenders Association, which represents short-term lenders, said the CFPB report is based on data that is five years old.
“A more current study would have revealed that fees tied to non-sufficient funds returns of Internet lenders and other merchants have been significantly reduced,” Crowley said in an e-mailed statement. “But the report also once again exposes the high fees consumers pay for bank overdrafts, which is why many consumers rely on the short term loans provided by our members.”
The association argues that short-term lenders put $1 billion into Ohio’s economy.
Asked if banks have rules to limit repeated attempts by short-term lenders to withdraw money from borrowers’ accounts, Jesse Leary, section chief for research at the CFPB, pointed to bank policies that only limit the number of overdraft fees banks can charge in a day.
Cordray declined to comment on new regulations the bureau is considering. But one proposal that has been floated would require lenders to consider whether borrowers can actually afford loans they seek, an approach favored by the Center for Responsible Lending.
Short-term lending has long been seen as a problem in Ohio and other states. Despite 2008 reforms in Ohio which placed a cap on payday loan interest rate at 28 percent, Ohioans continue to pay some of the most expensive loan rates in the country, a Pew Charitable Trust study said last year.
The Center for Responsible Lending (CRL) and others have argued that payday lenders have used loopholes to keep consumers in debt, operating practically without limits on charges, they have alleged.
In November 2015, the CRL said it counted 836 storefronts in Ohio that make payday or car title loans. And the organization said the lenders collected more than $502 million in loan fees from Ohioans each year, twice as much as what payday loans charged in 2005.
Diane Standaert, CRL executive vice president and director of state policy, said Wednesday that payday lenders “saturate” Ohio, with stores typically found in low-income neighborhoods.
She said the most effective policy is one states can take and one that Ohio voters have already asked their state to do: Enact a 28 percent rate cap, down from 300 percent. But lenders have evaded that cap through higher fees and “loopholes,” she said.
The bureau could not cap rates, but it could issue rules that require lenders to assess whether a loan sought by a borrower is affordable, Standaert said.
“Payday lenders cause incredible harm to low-income consumers every day,” she said.
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