CFPB Report Hits Payday Loan Industry Hard
When the Consumer Financial Protection Bureau, or CFPB, began considering regulations for the short-term loan industry, the agency started the process by doing its homework. Recently, the CFPB released its findings, which hit the payday loan industry hard. During a press conference, Richard Cordray, the agency’s director, said, “We promise to consider this data further as we continue to prepare new regulations to address issues with small-dollar lending.” The Bureau reports that it will be releasing its official list of proposed rules later this year.
What the CFPB Report Findings Revealed
According to the CFPB Monitor, the agency’s recent press release confirmed three main findings from its research efforts. The first finding confirms that half of all online borrowers accrue charges of $185 in bank fees on average. For the second finding, the agency reports that one third of these borrowers end up losing their checking accounts while the third finding covers repayment withdrawal attempts. The CFPB notes that short-term lenders have a tendency to complete repeat debit attempts in an effort to recollect the borrowed funds. These attempts often fail.
When it comes to the details, the report shows that short-term lenders may process multiple attempts in one day to regain funds. This occurs at a rate of 18 percent. The CFPB admits that the multiple attempts are likely due to the lender trying smaller amounts to collect a portion of the funds owed. Lenders could also be trying to collect fees that borrowers incur.
Research shows that when lenders complete multiple payment requests, they receive their funds 76 percent of the time and fail because of insufficient funds at a rate of 21 percent. When lenders split the payments, one fails while one is approved 3 percent of the time. These findings may inspire the Bureau to establish restrictions on multiple attempts since banks usually charge consumers additional fees for them.
Pymnts.com notes that the CFPB’s findings regarding the ability of borrowers to repay loans will likely result in legislation that makes lenders better assess the financial standings of their borrowers. The Bureau reported that it might include regulation that will require lenders to confirm that people are able to pay back the funds that they borrow.
Richard Cordray said, “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay.” To assess a borrower’s capacity to repay a loan, short-term lenders may need to check credit reports and verify annual incomes. The added steps could decrease people’s access to emergency funds.
Making Loans Affordable
An earlier CFPB report shows that annualized percentage rates for payday loans often exceed 350 percent. Due to these findings, the CFPB is likely to enact regulation that will decrease the amount that lenders charge for short-term loans. According to the CFPB’s website, payday loan companies typically charge $10 to $30 for every $100 that they lend. These fees equal an annual percentage rate of at least 350 percent or more. To make short-term loans more affordable, the CFBP is considering enacting a law that caps the annual percentage rate to 36 percent.
A Problem with Repeat Borrowing
While researching the payday loan industry, the CFPB also found that repeat borrowing is an issue. For instance, someone may borrow emergency funds for a car repair, but when the funds are due two weeks later, he or she may not have the money to cover the loan. In today’s economy, many people are living paycheck to paycheck. To continue making ends meet, the borrower may take out multiple loans in a row. The CFPB’s research determined that just 40 percent of borrowers stop after taking out one loan.
To end this destructive cycle, the CFPB may pass rules that limit the number of consecutive loans that borrowers can take out. The Bureau has proposed a restriction that limits the loan number to three successively. Once a borrower hits that number, he or she would have to wait 60 days to request another loan.
Research Inspires Change
The CFBP’s research into the payday loan industry shows that when lenders have access to their borrowers’ checking accounts, they may cause harmful situations such as the accrual of bounced check or overdraft fees. They may even cause the bank to close a borrower’s account. When compared to traditional lending situations, short-term loan lenders charge higher interest rates, and in many cases, these lenders do not fully vet a borrower’s ability to repay a loan. On the other hand, due to the successfulness of the short-term loan industry, people clearly need access to temporary and emergency funds.