Thank you all for joining us today. After much study, we are releasing our white paper on payday and deposit advance loans. This is perhaps the most comprehensive study to date on the short-term, small-dollar loan market. And what we have found is that too often consumers are getting caught in a revolving door of debt.
This study confirms that payday and deposit advance loans, while designed for short-term, emergency use, are leading many consumers into long-term, expensive burdens. 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.
The purpose of this white paper is twofold. First, as part of the Bureau’s commitment to data-driven policy analysis, it provides information that may facilitate discussion around a shared set of facts. Second, it provides market participants with a clear statement of the concerns that our analysis raises.
Payday and deposit advance loans are short-term, high-cost loans made in exchange for a commitment to repay from the person’s next paycheck or other source of income. What we found is there is not much difference, from the consumer’s perspective, between payday loans and deposit advance loans. They have similar purposes and, as it turns out, similar usage by consumers.
Some of the trends we saw with both products are startling. 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 out another one. Nearly half of all payday borrowers take out 11 or more loans a year. The median payday borrower took out 10 loans in a year and paid $458 in fees. For 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.
This sustained use may result from a variety of factors, including a lack of good underwriting. Lenders may rely on their ability to directly debit the consumer’s account when the consumer’s next paycheck or benefits payment is due rather than assessing whether the loan is affordable in light of the borrower’s income and other expenses. Other obligations like rent, grocery bills, or utility bills may not be factored into the loan consideration.
In addition, the structure of most of the loans might, in fact, be contributing to the repeat use of what is supposed to be a “once in a blue moon” product. For example, paying back the entirety of the loan after a brief period of time – a balloon payment structure – may cause the borrower to lack enough remaining funds for their other expenses. If the consumer was short $300 when she tried to pay her rent during the last pay period, finding the extra $300 to repay the loan this pay period might be equally implausible – especially since she now has to pay back a $45 fee on top of the $300.
In the end, consumers are at risk of using these products in ways that go beyond their intended purpose. Designed as short-term solutions to an emergency need, it is unclear whether borrowers fully understand that, for many of them, the consequences will linger far longer than they expect. This concerns us at the Consumer Bureau because financial products that trigger a cycle of debt can disrupt the precarious balance of consumers’ financial lives, leaving them worse off.
In January 2012, the Consumer Bureau added payday lenders to its supervision program on top of its existing efforts to supervise the depository institutions that offer deposit advance products. We also held a field hearing in Birmingham, Alabama, to hear directly from consumers. And we began our study on these issues, which has come to fruition with today’s white paper. The purpose of all our outreach, research, and analysis on these issues is to help us figure out the right approach to protect consumers and ensure that they will have access to a small loan market that is fair, transparent, and competitive.
As we look to next steps, we will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit. There is a clear demand for small-dollar credit products, which can be helpful at times for consumers who use them on an occasional basis and can manage to repay them. We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures.