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Hearing your stories on payday lending

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Today, the Consumer Financial Protection Bureau traveled to Birmingham, Ala., for our first field hearing. We gathered to discuss and collect information on payday lending. The payday lending market is a multi-billion dollar industry in the United States, and Alabama has one of the largest concentrations of payday lenders in the country.

Payday loans can arrive the same day and are usually due to be paid back within two weeks. Many consumers turn to payday loans because they find themselves in a financial pinch. However, these small-dollar loans can come at a hefty price, sometimes with an APR of more than 400 percent. When consumers can’t pay on time, they find themselves taking on more debt to cover the previous loan that has now come due. This can quickly lead consumers down a road of risk that often spirals into an ongoing cycle of debt.

We understand that there is demand for small-value loans from many consumers. Even some traditional banks now offer a similar product called a deposit “advance.” But we want to make sure that consumers understand the consequences of their decisions and are protected from risks that may be inherent in these products. Today, we released our procedures for examining bank and nonbank institutions offering short-term, small-dollar loans.

The goal of our field hearing is to listen, learn, and gather information to help us better understand the payday lending market so that we can choose the appropriate tools to balance the needs of consumers with the risks they face. Please use the comment box below to tell us about your experiences with payday loans. (You can also tell us your story privately.)

  • SAWynD

    Please act quickly to rein in the payday lenders. 

  • M. Clinton Richter

    I tire of the claim that these loans are offered up at 400% APR which creates the illusion that a person borrowing $200 ends up paying back 4 times the interest or some $1000-.    The fact is, most of these loans are limited to a month or so a $200 loan for a month at that APR would be more like $65-.  The use of an APR to measure the cost of any short-term product (payday loan, overdraft protection, ATM fee) is like using miles per hour to measure the a runners speed in a 50 yard dash.   Is it true?  Sure.  But is the best way to measure the cost? No. 

    Updating outdated cost measurements would take the the inflammatory language out of the conversation, and the true dollar cost incurred by consumers could be legitimately discussed.   What is more evident, then when the CFPB cites a triple digit APR in its opening discussion about payday lending? 

    • customer

      To exempt payday lenders from the federal requirement to state the cost of the credit they offer as an APR would roll back the most basic consumer protection for borrowers. For markets to work as they are supposed to do, consumers need a simple measure that allows them to compare the cost of credit. The APR is an accurate comparative measure. In the bad old days before the Truth in Lending Act was passed, lenders concealed the true cost of their credit in many clever ways. This made it hard for consumers to shop around and compare cost.

      The APR on payday loans is high because the credit is very expensive. The APR allows us to compare apples (credit) with apples (credit), but the payday lenders say their product is an orange that can’t be compared to the cheaper fruit. That’s bogus. If it’s credit, it has an APR. So state it and let people compare your product with the others.

      • Tybirdbb

        Thank you M. Clinton Richter & Scott Putnam (below post) for infusing some common sence into this discussion.

        Customer: APR = Annual percentage rate. When you hear the word ‘annual’ what does it make you think of? Per year, yearly? I bet it doesn’t make you think of two weeks, one month, maybe a month and a half, does it? Probably not, but that is generally the term of a pay day loan. So putting an APR on a payday loan isn’t really allowing payday loan applicants to compare APR’s correctly. The terms (time frames) aren’t comparable. I’m not one to blast someone’s suggestions without providing a possible resolution. Maybe we could try ‘finance charge’ – as in a dollar amount per $100 borrowed. Like Richter said – we need to speak to dollar amounts, not APRs.

        • George

          When comparing rates, time is a crucial variable. My credit card charges me 20% a year, or $20 for every $100 I borrow. That sounds about the same as a payday loan, but it isn’t. The payday lender charges me that rate every 2 weeks, not every 52 weeks. Unless you hold time constant, which is what the APR does, a fair comparison of rates isn’t possible.

          The only people who object to stating the APR in the contract are the lenders, because they don’t want customers to compare how expensive the debt is. Give consumers the information and let them decide. Don’t let payday lenders opt out of the consumer protection system imposed on every other creditor!

          • Tybirdbb

            So you want lenders to use APR – what do you suggest is used as a reference of time? Five years like most auto loans? 15 or 30 years like most mortgage loans? If lenders did that the APR would reach into the ten of thousands+.

            Anyone with a finance backgroud would realize the problem of placing an APR on a short term product.

            I am not saying the current systems is perfect – that is why I suggested we use a dollar amount to present the cost of borrowing (above post). People understand $$$, not many people understand APR.

  • customer

    I got a payday loan in a state that doesn’t cap rates and it cost a lot more than in states that limit the fees. I paid $22 for every $100 I borrowed, but across the border the cost was $15 for a $100 loan. Free markets are supposed to reduce costs, but that’s not true in the market for payday loans. The freer the lenders are from regulation, the more they charge.

    There’s no good reason why a $100 payday loan should cost $22 when the lenders in the regulated states can earn a good profit at the lower rate. Capping the fees everywhere would protect consumers from being exploited in the states where the lenders own the legislature and are allowed to charge whatever they want to people who don’t have many other choices.

    • http://www.facebook.com/people/Scott-Putnam/1429090230 Scott Putnam

      The only folks bashing the payday loan industry are the consumer groups that get paid to do so. They are always short on facts and actual customers that used the loans and were hurt.  Killing the industry would result in the loss of about 100,000 jobs and important option for consumers. Would you loan someone $100 for 14-31 days for any less than $15? Would you borrow $100 with a fee of $15 to prevent $39 overdraft fees at your bank? There is a reason that people use payday loans and it’s not because they are stupid.

      While I agree that the CFPB is a very good thing, it should and must not be a tool of consumer groups to do their bidding.

      • Phil in Michigan

        “Killing the industry would result in the loss of about 100,000 jobs” 

        This is nothing more than a statement of an industry person, making unsupported claims about potential job losses in order to continue the gouging that is going on.

        Even if true, it’s like saying that the RICO laws were a bad idea because they made loansharking more difficult and members of the mob lost out on the work.

        If the likelihood of default is so high that the lender needs a triple-digit interest rate to compensate for the risk, then the loan should not be made.  There are sound policy reasons for usury laws.  Desperate people do imprudent things.  Payday lenders take advantage of that desperation and call it a “service.”  The argument that payday lenders provide a solution to a borrower’s sporadic cash flow shortage is largely a myth.  As the industry knows, the majority its borrowers are in total economic shambles and the payday loans are just a final fleecing that takes place prior to the inevitable bankruptcy.

    • Tybirddbb

      $15 per $100 borrowed is cheap, $22 per $100 is cheap, too. Remember that payday loan operators have anywhere between 20% - 30% default rates thru out the year – add in overhead – and there isn’t much profit left over at the end of the day.

      Sure, operators could make their pre-qual process more stringent to reduce default, but that would increase the cost to originate – making it a wash. A happy medium would be to limit the time a loan could be refi’d, or rolled over. Once the operator has recoup’d his/her principal & made some profit to cover his/her risk’s then the loan should be charged off.

      • George

        Only a payday lender or some clueless ideologue could think $66 for a two-week $300 loan is cheap. The customers don’t think the loans are cheap. In survey after survey they say the price should be lower.

        A fee of $22 per $100 is nearly 50% higher than a fee of $15 for the same loan. Lenders can make good money at a rate of $15. But if the state governments let them charge more, the lenders make more loans to people with the worst credit. The default rate goes up and the decent people who pay back their debts have to cover the extra losses. It isn’t fair.

  • CBARTZ

    i HAVE SUCCESSFULLY USED PAYDAY LOANS FOR YEARS TO HELP MY FAMILY WHEN WE ARE IN A SHORT TERM FINANCIAL NEED.  i USUALLY HAVE THE LOAN FOR 45 TO 60 DAYS AND THEN PAY IT OFF.  IF PAYDAY LOANS WERE NOT AN OPTION I WOULD HAVE HAD NO SOLUTION FOR MY NEEDS.  LOCAL BANKS ARE NOT GOING TO WORK WITH ME.  I KNOW BECAUSE I TRIED.

  • Jim

    If it had not been for Payday loans I would have not been able to pay bills, buy groceries or purchase my medications. I am so glad you were there when I needed fast cash.

  • M Miller

     I think these short-term loans fill a need that most consumers need. When used RESPONSIBLY, these loans work out great for every one involved. I worked in the industry and saw many irresponsible borrowers take out loans at multiple companies. This causes a lot of problems! We need a better system, in the industry to see that this doesn’t happen. If we don’t police ourselves, some one else will, ith very different results!

  • David Angle

    Conveniently omitted from the industry comments here is that a great majority of payday loans continue to roll over as the “balance” becomes higher and higher. This inflated “loan” is then magically transformed into a “new loan” with a higher balance and, thus, higher finance charges. This happens all the time in Missouri, my home state, even though the practice is purportedly illegal. 

    This is how payday lenders become hugely profitable criminal enterprises; and when a loan defaults, the industry doesn’t simply write it off. They sue to collect and tack on additional, inflated charges in their lawsuits. If a judgment is obtained but not fully collected, the “debt” is sold to vulture debt buyers and the process repeats. People’s wages get garnished and they remain in a cycle of company store oppression.

    It is beyond time to eliminate the predators of this criminal industry. Enough.

  • Boomer759

    The thing about the whole payday loan mess is this, once someone gets roped into a payday loan it becomes increasingly more difficult to get away from it. Yeah, the loans may be limited to one at a time, or two a month but inevitably when a consumer goes in and pays the previous loan off they are forced to take another one in order to make up what they just paid off.

    It’s a viscious, viscious cycle that targets individuals with poor credit and ensnares them in a seemingly never-ending cycle of get a loan, pay the loan and the fee, get a loan, pay the loan and the fee, get a loan, pay the loan and the fee. For many the cycle may not end until they default on the loan or get lucky enough to get a tax return or loan and get far enough ahead to break the cycle.

    Payday loan lenders will tell you what a great benefit they offer, and how the don’t make huge amounts of money off of these loans but when you do the math there is a different story to be told. Assume the fee on a $500 payday loan is $75 (I dont remeber what it was when I was caught up in this so this is just a random guess) and also assume that the borrower is unable to escape the cycle for a full year (26 totals loans). That individual has paid out $1950 in fees for that $500.

    Now take the $1950 and multiple it by say 1,000 consumers and your payday loan lender has made themselves $1,950,000 for the year.

    Personally I would say that 1,000 consumers is a VERY low number for many lenders. So spare me the whole “We arent making any money” garbage.

    • Tybirdbb

      There are State laws already in place that limit lenders to the amount of time they can refi or roll a loan over. My home State only allows up to four refi’s before the loan is charged off. So your above math equation has some holes in it. If a lender is breaking those rules already in place – they should be punished.

      When default is 20%+, and you’re only charging 15% = a busted business model. You’ll have lenders exit the business – leaving noone to offer credit to the PDL customer base. Banks won’t do it (why do you think the PDL industry was created?).

  • mprs70

    Kudos to the CFPB for reviewing the incentive compensation system paid to employees of payday lenders during its audits.  That is the best way to identify potential abuses in the system.

  • Jeffy01

    I hope that the CFPB is focusing on the unlicensed tribal and Internet lenders? I see those ads on TV all the time. I’m not sure folks are so worried about lenders that are already licensed and regulated? Cfpb needs to get the bad guys.

  • RoyHutcheson

    The reason there are a lot of stores that do Payday loans is because there is a need asnd demand for the
    service.  No one other than Payday operators fullfill the need when people have emergencies.  Banks and typical consumer lenders can not afford to offer small dollar loans, and most of the time family and friends can’t or won’t help.

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