The State of Lending in America: Debt-Trap Lending and its Impact on American Families Debbie Goldstein, Susanna Montezemolo, Pete Smith October 23, 2013
Debt-Trap Lending: PAYDAY LOANS Overview Run out of money before next paycheck; get another payday loan to make ends meet Pay back principal & interest on payday Get Payday Loan Secured by Post-Dated Check
Debt-Trap Lending: PAYDAY LOANS Borrower Impact • Overview of non-bank payday loans: • Median loan size $350, total interest $458 • Average APR: 400% + • Average 10 loans per year; 199 days per year (55%) indebtedness • Total fees of $3.4 billion, at least $2.6 billion of which are a direct result of loan churn • Overview bank payday loans: • Median loan size: $100 • Average loans per year: 13.5 • Average APR 200-300% • Over one-quarter receive Social Security • Twice as likely to pay overdraft fees as bank customers as a whole
Debt-Trap Lending: PAYDAY LOANS Additional Consequences of Default Sources: http://bit.ly/PaydayResearch
Debt-Trap Lending: PAYDAY LOANSCharacteristics of Payday Borrowers Income: CFPB found median net income of around $22,500. States report higher average gross incomes of $30,000 in Colorado and around $33,000 in Illinois. Demographics: Pew: Five groups more likely to receive payday loans: those without college degrees, renters, African Americans, those earning under $40k, and those who are separated or divorced. Military Targeting: Decreased after passage of MLA. However, some lenders engage in subterfuge and offer high-cost, abusive open-end or installment payday loans, which are not covered under the Act.
Debt-Trap Lending: PAYDAY LOANS State Laws Have Caused an Industry Decline Consumer-friendly changes in state laws have led to decline in total storefront locations nationwide and decline in total fees resulting from loan churn. However, important to note that where payday loans are offered, the debt trap causes very real harm to individuals
Debt-Trap Lending: PAYDAY LOANSHigh-Cost Payday Loans Harm Families States with Highest Total Payday Fee Drain Texas California Florida Mississippi Alabama States with Most Storefront Locations Texas California Florida Tennessee Alabama
Debt-Trap Lending: PAYDAY LOANSMovement to Payday Installment Loans In states with little to no regulation of installment loans, particularly those with no rate cap, payday lenders have increasingly migrated to high-cost installment loans. Payday lenders pushing debt trap payday installment proposals in states that have significant payday regulations Some states specifically authorize payday installment loans These payday-like installment loans are still structured as debt trap products
Debt-Trap Lending: PAYDAY LOANSEffective State and Federal Action Con’t Federal regulators have cracked down on bank payday lending: The OCC and FDIC proposed guidance directing their banks to avoid payday lending; will be finalized soon. The Federal Reserve Board issued a similar supervisory statement to its banks. The CFPB is preparing for a major rulemaking on payday lending that would cover all lenders, regardless of size or type. States have been effective at enforcing state laws
Debt-Trap Lending: PAYDAY LENDING Questions?
Debt-Trap Lending: CAR-TITLE LOANS Overview Trades Car Title (for Car Owned Free-and-Clear) for 300% APR Loan Cannot Afford to Repay Loan in 30 Days Borrower Experiences $ Shortfall Borrowers renew loans repeatedly. Lender may repossesses vehicle (after multiple loans)
Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact • Car-title loans are available in 21 states and cost borrowers $4.3 billion fees alone for $1.9 billion in non-churn loans. • Car-title lenders lend a fraction of the car’s cost—26%—and use a car as collateral yet still make loans at 300% APR. • Repossession fees compound the problem: fees averaging $350-400 and equaling half of a typical borrower’s loan balance get tacked on when a borrower defaults.
Debt-Trap Lending: CAR-TITLE LOANSBorrower Impact Con’t Repossession is Very Real—and Very Expensive One in six (17%) of borrowers incurred a repossession fee, typically $350-400 and averaging half of the borrower’s outstanding balance. In New Mexico, it is much higher, with fully 60% of car-title customers permanently losing their vehicle in 2008.
Debt-Trap Lending: CAR-TITLE LENDING Questions?
Debt-Trap Lending: OVERDRAFTS Overview Bank Lends Funds Anyway Transaction Overdraws Account Levies High-Cost Fee Bank Repays Itself in Full at Next Deposit
Debt-Trap Lending: OVERDRAFTSKey Predatory Features Debt-trap Structure Automatic Set-off Transaction Reordering
Debt-Trap Lending: OVERDRAFTSKey Predatory Features Con’t Transaction Reordering Example: Bad
Debt-Trap Lending: OVERDRAFTSKey Predatory Features Con’t Transaction Reordering Example: Worse
Debt-Trap Lending: OVERDRAFTS Borrower Impact • In 2011, overdraft fees cost consumers $16.7 billion. • Two-thirds of these penalty fees are paid by account holders charged more than six fees per year.
Debt-Trap Lending: OVERDRAFTSHigh-Cost Overdrafts Harm Families Debt-Trapped Borrowers = Banks’ Bread and Butter
Debt-Trap Lending: PAYDAY LENDING Questions?
The State of Lending: Debt-Trap LendingMAJOR MEDIA INTEREST AND COVERAGE “Payday loans have long been huge financial traps for cash-strapped, low-income borrowers. Several states have tightened regulations to clamp down on these ‘quick fix’ loans … But a lot more needs to be done ….” New York Times Editorial, 9/16/13
The State of Lending:The Final Chapters Predatory Practices and Abuses in Debt Buying and Debt Collection The Cumulative Impact of Predatory Lending Late 2013/Early 2014
For More Information Debbie Goldstein, Executive Vice President firstname.lastname@example.org 919-313-8517 Allyn Summa, Director of Development email@example.com 202-349-1888