Consumers Deserve Better than a 400% Interest Rate
Public comments are due on May 15, 2019 regarding the Consumer Financial Protection Bureau’s (CFPB) decision to rescind the mandatory underwriting provisions of the Payday, Vehicle Title, and Certain High-Cost Installment Loans rule. Visit the CFPB’s website HERE for more information or to submit your comments.
April 17, 2019
Dear Director Kraninger –
Please accept this letter in response to the Consumer Financial Protection Bureau’s (CFPB) notice of proposed rulemaking for the Payday, Vehicle Title, and Certain High-Cost Installment loans (CFPB-2019–0006; 84 FR 4252). This letter documents my opposition to the CFPB’s proposal to rescind important provisions of this rule.
Rigorous research supports the widespread consensus that high-cost payday loans harm consumers. In an opinion editorial penned shortly after he assumed the position of Acting Director of the CFPB, Mick Mulvaney wrote, “When it comes to enforcement, we will focus on quantifiable and unavoidable harm to the consumer. If we find that it exists, you can count on us to pursue the appropriate remedies vigorously.”i The CFPB should act on the existing rigorous research, including its own,ii and enforce the rule’s mandatory underwriting provisions that are slated for elimination.
The number of payday and other higher-cost lenders is growing in communities across the United States.iii This growth is alarming given that consumers rely on the financial services located within their communities, and consumers use higher-cost lenders when they are more accessible.iv Payday and other higher-cost lenders also tend to operate in Black and Brown communities,v meaning that marginalized groups disproportionately bear the burdens of this higher-cost debt.vi Moreover, a majority of borrowers — 69% — use payday loans to cover recurring, necessary expenses like utilities, credit card bills, rent or mortgage payments, or food.vii In other words, borrowers do not just use these higher-cost loans for emergencies. They use these loans that are falsely marketed as temporary and short-term to finance their day-to-day living.
Payday and other higher-cost loans are incredibly expensive. Payday loans have an average annual interest rate of approximately 400%,viii an exorbitantly high rate when compared to the average annual interest rate of 4% charged by banks for small loans.ix Since interest rates and finance fees make it difficult for borrowers to repay their original loans in full, about 15% of borrowers renew their loans more than 10 times and the average borrower is indebted about five months out of the year.x
The high price that borrowers pay to use payday loans can further undermine the financial well-being of already marginalized groups.xi Borrowers earning less than $25,000 per year spend roughly 10% of their annual income on interest and fees to high-cost lenders — money that could be diverted to other necessary expenses.xii Payday loan borrowers also experience negative effects on their credit scores,xiii delay necessary medical treatment, and struggle to pay their bills.xiv Given these negative consequences, it is not surprising that consumers want stronger protections from these higher-cost loans.xv
Some contend that payday and other higher-cost loans fill an important market niche, helping consumers with their emergencies and short-term liquidity needs.xvi However, payday and other higher-cost loans exemplify a market failure — not a niche. Or, viewed more cynically, payday loans exemplify the market working as intended — extracting lucrative profits by preying on marginalized groups that have fewer financial resources to spare.
The research is clear, and consumers deserve better than a 400% interest rate. To protect consumers and support their dignified financial well-being, the CFPB should enforce this rule as it was originally designed.
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References
i CFPB. (2018, January 17). Acting Director Mick Mulvaney announces call for evidence regarding Consumer Financial Protection Bureau functions. Washington, DC: CFPB. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/acting-director-mulvaney-announces-call-evidence-regarding-consumer-financial-protection-bureau-functions/
Mulvaney, M. (2018, January 27). The CFPB has pushed its last envelope. Wall Street Journal. Retrieved from https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561
ii CFPB. (2013). Payday loans and deposit advance products: A white paper of initial data findings. Washington, DC: CFPB. Retrieved from https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf
CFPB. (2014). CFPB data point: Payday lending. Washington, DC: CFPB, Office of Research. Retrieved from https://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
iii Eastlund, R., & Friedline, T. (2017). How features of payday loans vary by state regulation. Washington, DC: New America, Family Centered Social Policy. Retrieved from https://www.newamerica.org/family-centered-social-policy/policy-papers/how-features-payday-loans-vary-state-regulation/
Faber, J.W. (2018). Cashing in on distress: The expansion of fringe financial institutions during the Great Recession. Urban Affairs Review, 54(4), 663–696. https://doi.org/10.1177/1078087416684037
Friedline, T., & Despard, M. (2017). Mapping financial opportunity. Washington, DC: New America, Family Centered Social Policy. Retrieved from https://www.newamerica.org/in-depth/mapping-financial-opportunity/
iv Bhutta, N. (2014). Payday loans and consumer financial health. Journal of Banking & Finance, 47, 230–242.
Friedline, T., Despard, M., & West, S. (2019). Does the composition of financial services in a community relate to an individual’s savings account ownership? Journal of Community Practice, 27(1). doi: 10.1080/10705422.2019.1580652
Friedline, T., Dunham, I., & O’Brien, M. (2019). The financial services environment and schools’ savings rates in the San Francisco Kindergarten to College program. Ann Arbor, MI: University of Michigan School of Social Work.
Friedline, T., & Kepple, N. (2017). Does community access to alternative financial services relate to individuals’ use of these services? Beyond individual explanations. Journal of Consumer Policy, 40(1), 51–79. doi:10.1007/s10603–016–9331-y
v Faber, J.W. (2019). Segregation and the cost of money: Race, poverty, and the prevalence of alternative financial institutions. Social Forces. Advance online publication. https://doi.org/10.1093/sf/soy129
Fowler, C., Cover, J., & Kleit, R. (2014). The geography of fringe banking. Journal of Regional Science, 54(4), 688–710. https://doi.org/10.1111/jors.12144
vi Friedline, T. (2018). Unequal fintech landscapes: Communities’ rates of high-speed internet access, smartphone ownership, and online and mobile banking. Washington, DC: Family Centered Social Policy. Retrieved from https://d1y8sb8igg2f8e.cloudfront.net/documents/Unequal_Fintech_landscapes_FINAL.pdf
vii Pew Charitable Trusts. (2012). Payday lending in America: Who borrows, where they borrow, and why. Washington, DC: Pew Charitable Trusts, Small-Dollar Loans Project. Retrieved from http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
Pew Charitable Trusts. (2013). Payday lending in America: Policy solutions. Washington, DC: Pew Charitable Trusts, Small-Dollar Loans Project. Retrieved from http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/pewpaydaypolicysolutionsoct2013pdf.pdf
Pew Charitable Trusts. (2016). Payday loan facts and the CFPB’s impact. Washington, DC: Pew Charitable Trusts, Small-Dollar Loans Project. Retrieved from http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact
viii The average annual interest rate is $391 — just a few dollars shy of $400.
Pew Charitable Trusts. (2016). Payday loan facts and the CFPB’s impact. Washington, DC: Pew Charitable Trusts, Small-Dollar Loans Project. Retrieved from http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact
ix Saunders, A., & Schumacher, L. (2000). The determinants of bank interest rate margins: An international study. Journal of International Money and Finance, 19(6), 813–832. doi:10.1016/S0261–5606(00)00033–4
x CFPB. (2014). CFPB data point: Payday lending. Washington, DC: CFPB, Office of Research. Retrieved from https://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
Pew Charitable Trusts. (2013). Payday lending in America: Policy solutions. Washington, DC: Pew Charitable Trusts, Small-Dollar Loans Project. Retrieved from http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/pewpaydaypolicysolutionsoct2013pdf.pdf
xi Baradaran, M. (2015). How the other half banks: Exclusion, exploitation, and the threat to democracy. Cambridge, MA: Harvard University Press.
xii KMPG. (2011). Serving the underserved market. Washington, DC: KMPG. Retrieved from http://www.kpmg.com/us/en/issuesandinsights/articlespublications/press-releases/pages/underserved-market-represents-opportunity-for-banks.aspx
xiii Bhutta, N., Skiba, M., & Tobacman, J. (2015). Payday loan choices and consequences. Journal of Money, Credit, and Banking, 47(2–3), 223–260. doi: 10.1111/jmcb.12175
xiv Melzer, B. (2011). The real costs of credit access: Evidence from the payday lending market. The Quarterly Journal of Economics, 126(1), 517–555. doi:10.1093/qje/qjq009
xv Pew Charitable Trusts. (2017). Payday loan customers want more protections, access to lower-cost credit from banks. Washington, DC: Pew Charitable Trusts. Retrieved from http://www.pewtrusts.org/~/media/assets/2017/04/payday-loan-customers-want-more-protections.pdf
UnidosUS. (2016). NCLR collects thousands of signatures and comments on new CFPB proposed rule to regulate predatory lending industry. Washington, DC: UnidosUS (formerly National Council of La Raza). Retrieved from https://www.unidosus.org/about-us/media/press/releases/CFPB-Payday-Lending-10716
xvi Lohr, S. (2015, January 19). Big data underwriting for payday loans. The New York Times. Retrieved from https://bits.blogs.nytimes.com/2015/01/19/big-data-underwriting-for-payday-loans/
Morduch, J., & Schneider, R. (2017). The financial diaries: How American families cope in a world of uncertainty. Princeton, NJ: Princeton University Press.
Servon, L. (2017). The unbanking of America: How the new middle class survives. New York, NY: Houghton Mifflin Harcourt.
