Posts Categorized: News

A Reporter’s Inside Look at the Confusing World of Online Payday Lending

National Public Radio (NPR) reporter Pam Fessler recently experienced firsthand the murky world of online payday lending. In the course of reporting a story, Fessler logged on to a site called eTaxLoan.com and completed an application for a $500 dollar loan. Despite using a false name, address, social security number, and bank account, Fessler was immediately pre-approved for a one week $750 loan. The fees and interest for the loan would amount to $225—an annual percentage rate of more than 1300%. Needless to say, Fessler did not approve of these terms and logged off the website.

Her story did not end with her decision to reject the loan offer. Whereas Fessler used a fake name and address, she did supply the site with a correct phone number. Within minutes of declining the loan, a representative of the lending company contacted her to offer a high-interest loan. Even after disclosing that she was reporter working on a story and not at all interested in obtaining a loan, the calls kept coming. For the next several months Fessler received dozens of calls letting her know that she had been approved for loans up to $5,000. Her efforts to find the companies behind these calls usually resulted in unreturned emails and disconnected phone numbers.

After a great deal of investigation, Fessler learned that sites like eTaxLoan.com are not themselves payday lenders. Rather, these sites operate as marketing firms directing potential consumers to lending companies for a fee. Once an application has been submitted, the consumer’s personal information can be sold to any number of payday lending providers, often leaving the consumer completely in the dark as to who they are dealing with. As BenJamin Lawsky, superintendent of financial services for New York, notes, “Because they’ll have front companies and shell companies and they’ll be in different states, you can never really get to the bottom of who is behind the marketing, the lead generating, and the lending itself.”

The buying and selling of consumers’ personal information is but one more example of the inherently predatory nature of the payday lending industry and affiliated businesses. Payday loans, whether made in a store or on a computer, are designed to trap individuals in a long term cycle of indebtedness. Policymakers must continue to take steps to rein in these abusive lending practices.

 

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Poll Shows Bipartisan Support for Regulation of Payday Lending Industry

A recent poll of over 1,000 likely national voters conducted by Lake Research Partners indicates strong consumer support for financial regulation. Participants were especially outspoken about the payday lending industry; findings include:

  • Over 70 percent of participants had an unfavorable opinion about payday lenders with 57 percent of total respondents describing their opinion as very unfavorable. Conversely, only 3 percent of respondents expressed their opinion as very favorable and 7 percent as somewhat favorable.
  •  When asked how important it is to regulate financial services and products to make sure they are fair for consumers, over 90 percent of respondents believed it to be very or somewhat important. Financial regulation was overwhelmingly supported by likely voters who identify as Democrats (96 percent) and those who identify as Republicans (89 percent).
  • Almost half (41 percent) of respondents identified payday lending as a financial service in need of tougher regulation and oversight to protect consumers. This was the number one response among voters of both party affiliations beating out credit cards (33 percent) and student loans (22 percent).
  • Participants were asked to rate their support for the statement, “Small-dollar lenders must make sure a loan is affordable in light of a customer’s income and expenses.” Almost two-thirds (65 percent) of respondents strongly supported the statement and 24 percent were somewhat supportive. Only 8 percent of likely voters were somewhat or strongly opposed to the statement.

Click here to view the full poll results.

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Payday Loans Create a “Debt Treadmill”

While payday lenders may claim that they provide a needed service for consumers faced with an unexpected financial crisis, the newest chapter in the Center for Responsible Lending’s (CRL) State of Lending series suggests otherwise. Drawing on data from a number of recent studies, CRL notes that the majority of payday loans are taken out for recurring, everyday expenses. Unfortunately, high-interest, short-term debt is inherently ineffective at addressing recurring budget gaps and leaves the borrower with few options other than taking out additional high-cost loans. The cycle of renewing existing loans or taking out additional loans shortly after paying off existing debt—known as loan churning—leaves many consumers on a seemingly inescapable debt treadmill. The payday lending industry relies heavily on these repeat borrowers for its revenue; every time a loan is churned, the lending fees increase yet the consumer is not granted access to new credit. CRL’s newest research indicates that of the $3.4 billion in fees payday lenders reap from consumers every year, $2.6 billion are the direct result of payday loan churning.

Over the past decade, an increasing number of states have ramped up their regulation and oversight of the payday lending industry. However, CRL identified 29 states with no substantive restrictions on payday lending. Not only is the Commonwealth included in this list, but Kentucky also stands out as having the highest average number of loans per borrower per year (10) in CRL’s comparison of selected states without meaningful regulation of payday lending. Furthermore, CRL’s report notes that Kentuckians pay a total over $112 million in payday lending fees each year.

Payday loans trap struggling families on a treadmill of debt that can lead to a host of negative consequences ranging from closed bank accounts to bankruptcy. CRL is committed to the mission of opposing predatory lending practices and the data presented in their newly released publications clearly show the high costs of payday loan debt traps. The most recent payday lending chapters, as well as the previously released State of Lending installments, can be accessed here.

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Director of Consumer Financial Protection Bureau Speaks to the National Baptist Convention; Addresses Payday Lending

Speaking before the National Baptist Convention, Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), called on religious leaders to continue offering guidance and support for members of their faith communities who are struggling financially. Using the story of Jacob’s Ladder as a metaphor, Cordray noted that for many families, particularly African-American families, the climb up the ladder of financial success, security, and stability has been a long and, as of yet, unfinished journey. Cordray remarked that the mission of the CFPB is to “hold the ladder steady” and empower Americans to make sound financial decisions. He warned of the “Four Ds” that may cause families to fall back down this ladder: deceptive marketing, debt traps, dead ends, and discrimination.

Debt traps, the second of the “Four Ds,” ensnare consumers in a downward spiral of indebtedness that can spell disaster for a family’s personal finances. The CFPB Director warned that products marketed as a short-term solution for immediate needs­–like payday loans–can be risky for consumers and often lead to a vicious cycle of borrowing to pay off high interest rates and compounding fees. Cordray thanked the religious leaders for being outspoken on the subject of payday loans and assured them that the CFPB is “paying close attention” and has teams dedicated to reviewing payday lenders’ business practices.

Cordray beseeched those in attendance to do more to prepare young people to make important financial decisions. He encouraged the audience to help spread the word about the CFPB’s mission and resources. The director closed his remarks with a statement of cooperation and optimism: “Together we can see to it that more people can climb that ladder to security and prosperity.”

Click here to read Richard Cordray’s remarks to the National Baptist Convention in their entirety.

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Kentuckians Ask Senators McConnell and Paul to Stop Blocking Consumer Financial Protection

The Kentucky Coalition for Responsible Lending delivered a message from almost 1,200 Kentuckians to Senate Minority Leader Mitch McConnell and Senator Rand Paul today: “It’s time to stop blocking consumer protection and confirm Director Richard Cordray to a full term at the helm of the Consumer Financial Protection Bureau (CFPB).” The petitions were delivered as part of a national movement during which over 160,000 Americans signed a petition from Americans for Financial Reform asking members of Congress to confirm Cordray and let the CFPB continue to do its job of protecting consumers. Director Cordray has been re-nominated to serve a full, five-year term. His leadership has won praise from Republicans and Democrats, and from bankers and consumer advocates. And yet, for two years, a group of Senators has been blocking his appointment. By law, the CFPB has limited ability to do the job it was created to do following the financial collapse in 2008 in the absence of a confirmed director. For more information, check out a press release issued today. And here are the petitions delivered to Senator McConnell  and Senator Paul.

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New Report: Payday Loans are gateway to long-term debt

New CRL Research: Average “short term” loan keeps borrowers in debt for 212 days per year
Center for Responsible Lending

Although payday loans are marketed as quick solutions to occasional financial shortfalls, new research from the Center for Responsible Lending shows that these small dollar loans are far from short-term.  PaydayLoans, Inc., the latest in a series of CRL payday lending research reports, found that payday loan borrowers are indebted for more than half of the year on average, even though each individual payday loan typically must be repaid within two weeks.

CRL’s research also shows that people who continue to take out payday loans over a two-year period tend to increase the frequency and extent of their debt. Among these borrowers, a significant share (44 percent), ultimately have trouble paying their loan and experience a default. The default results in borrows paying more fees from both the payday lender and their bank.

Federal banking regulators have voiced their concerns about long-term payday loan usage. For example, the Federal Deposit Insurance Corporation (FDIC) has stated that it is inappropriate to keep payday borrowers indebted for more than 90 days in any 12 month period. Yet CRL determined that the average borrower with a payday loan owed 212 days in their first year of payday loan use, and an average of 372 days over two years.

“This new report finds even more disturbing lending patterns than our earlier reports”, said Uriah King, a senior vice-president with CRL. “Not only is the actual length of payday borrowing longer, the amount and frequency grows as well. The first payday loan becomes the gateway to long-term debt and robs working families of funds available to cover everyday living expenses.”

CRL tracked transactions over 24 months for 11,000 borrowers in Oklahoma who took out their first payday loans in March, June or September of 2006. Oklahoma is one of the few states where a loan database makes this kind of analysis possible. CRL then compared these findings with available information from regulator data and borrower interviews in other states.

According to Christopher Peterson, a University of Utah law professor and nationally-recognized consumer law expert, “The Center for Responsible Lending’s latest research on multi-year, first-use payday loan borrowers provides conclusive evidence that payday loans are not short-term debts. Rather, their data shows payday loans evolve into a spiral of long-term, recurrent, and escalating debt patterns.”

Rev. Dr. DeForest Soaries, pastor of First Baptist Church of Lincoln Gardens in Somerset, New Jersey and profiled in Almighty Debt, a recent CNN documentary, also commented on the new research findings: “Reputable businesses build their loyal clientele by offering value-priced products and services. Customers choose to return to these businesses. But payday lenders build their repeat business by trapping borrowers into a cycle of crippling debt with triple digit interest rates and fees. Lenders should be completely satisfied with a 36 percent interest cap.”

To address the problem of long-term payday debt, CLR recommends that states end special exemptions that allow payday loans to be offered at triple-digit rates by restoring traditional interest rate caps at or around 36 percent annual interest. A 36 percent annual interest rate cap has proven effective in stopping predatory payday lending across seventeen states and the District of Columbia. Active duty service members and their families are also protected from high-cost payday loans with a 36 percent annual cap.

In addition, CRL notes that both states and the new Consumer Financial Protection Bureau at the federal level can take other steps such as limiting the amount of time a borrower can remain indebted in high-cost payday loans; and requiring sustainable terms and meaningful underwriting of small loans generally.

Further information on the report is available at:http://www.responsiblelending.org/paydaylending/researchanalysis/paydayloansinc.html.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

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