Short-term "payday" loans, and similar "deposit advance" loans offered by major banks, are trapping many consumers in a "revolving door of debt," according to a study due to be made public Wednesday by the Consumer Financial Protection Bureau.
Although it did not announce specific plans, the bureau signaled its intention to intervene in the market for the short-term, high-cost loans, which have stirred years of controversy in state capitals and among consumer advocates. Although payday loans' costs are typically represented as fees rather than interest, the report said the costs are often equivalent to an annual percentage rate, or APR, topping 300 or 400 percent.
It is unclear if the bureau's action was coordinated with an expected crackdown on the banks' deposit-advance products by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., reported by the New York Times and others. The CFPB recently began supervising traditional payday lenders, which previously had escaped most federal oversight.
In a briefing for journalists, CFPB Richard Cordray said the bureau found disturbing patterns when it looked at a sample of about 15 million loans in 33 states - in particular, evidence that a majority of the loans went to borrowers whose behavior belied the industry's claims that it largely helps consumers with occasional cash-flow problems. He said that from a consumer's standpoint, there was little difference between traditional payday loans and deposit-advance loans.
With both products, "there is high sustained use, which we consider to be not only when a consumer rolls over the loan, but also when he pays it off and returns very quickly to take on another one," Cordray said. He said the median payday borrower took out 10 loans a year and paid $458 in fees. Among deposit-advance borrowers, "more than half took advances totaling $3,000 or more, and of these borrowers, more than half paid off one loan and went back for another within 12 days."
The study said the loans "may work for some consumers for whom an expense needs to be deferred for a short period of time." But for others, the result is "a revolving door of debt," Cordray said.
"For too many consumers, payday and deposit advance loans are debt traps, and the stress of having to return every two weeks to re-borrow the same dollars after paying exorbitant fees and interest charges becomes a yoke on a consumer's financial freedom," he said.
Pennsylvania is among a handful of states, many in the Northeast, that have never explicitly allowed payday lenders to operate, although the loans are available nearby in Delaware and Ohio and were previously offered in Pennsylvania storefronts under a loophole in interstate-banking rules that was finally plugged by federal banking regulators. Although the industry has been lobbying for legislation allowing it to return, the Center for Responsible Lending says no states have enacted such laws since 2005, and some states have backtracked.
Payday loans are also widely available via the Internet, though consumer advocates and regulators have recently questioned the role of some major banks in enabling the online lending, which relies on bank operations such as direct deposit and preauthorized withdrawals for payment. It was unclear whether that role may be part of the OCC and FDIC's expected new warnings to banks.
The CFPB, which has consumer-lending authority over both banks and nonbank payday lenders, said it could act, perhaps by imposing a "cooling off period" between payday loans, under its authority over "unfair, deceptive or abusive acts or practices" in consumer lending.
The CFPB's study echoes findings in a February report by the Pew Charitable Trusts' Safe Small Dollar Loans Research Project. Pew said 58 percent of payday loan borrowers had trouble meeting monthly expenses at least half the time because they "are dealing with persistent cash shortfalls rather than temporary emergencies." Pew said juat 14 percent of borrowers "can afford enough out of their monthly budgets to repay an average payday loan."
Pew's report said payday borrowing "is largely driven by unrealistic expectations and by desperation."