Payday Loan Curbs Considered by Three U.S. Regulators

Federal regulators are moving to curb or eliminate high-interest, short-term lending that may ensnare consumers in a cycle of debt as they draw one loan to repay another.

The Consumer Financial Protection Bureau, following a study that focused on repeat usage of so-called payday loans made by storefront lenders and deposit advance products offered by banks, today said it will consider imposing waiting times between loans.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency plan to issue new guidelines to banks tomorrow that are similar to rules from the early 2000s that stamped out another form of payday lending, according to a person familiar with their plans.

CFPB Director Richard Cordray said that the agency’s research found that the industry’s longstanding argument that the loans help consumers who are occasionally strapped for cash is not necessarily true.

“Payday and deposit-advance loans, while designed for short-term emergency use, are leading many consumers into long- term, expensive burdens,” Cordray told reporters.

In its study, the bureau said it would consider “the effectiveness of limitations, such as cooling-off periods, in curbing sustained use and other harms.”

New restrictions on payday lending would fulfill a longstanding goal of consumer groups that fought for the creation of the CFPB in the Dodd-Frank law of 2010. It could also crimp business at lenders including Advance America Cash Advance Centers Inc., a unit of Grupo Elektra SAB (ELEKTRA*), Cash America International Inc. (CSH), EZ Corp. (EZPW), Community Choice Financial Inc. and Ace Cash Express Inc.

Storefront Lenders

The study, conducted by the CFPB over the past year, concerns loans that are offered by storefront lenders and are secured by a check, post-dated to a borrower’s next payday. Lenders do not typically gauge a borrower’s credit, and loans are repaid in full with one balloon payment that covers interest as well, usually after two weeks.

Similar loans, often called deposit-advance products, are offered by banks, which debit repayment directly from a checking account.

Cordray said that the agency’s indictment of short-term loans applies equally to the versions offered by traditional banks, which have started to offer them as part of a search for new revenue. Banks including Wells Fargo & Co. (WFC), Regions Financial Corp. (RF), U.S. Bancorp (USB) and Fifth Third Bancorp (FITB) have offered some type of deposit-advance loan.

Little Difference

“What we found is there is not much difference, from the consumer’s perspective, between payday loans and deposit advance loans,” Cordray said in a conference call with reporters. “They have similar purposes and, it turns out, similar usage by consumers.”

Jamie Fulmer, senior vice president for public affairs at Advance America, said the CFPB’s study is not based on the actual experience of its customers.

The agency needs to consider what other options they have for short-term credit, the risks of driving them to other products that are more expensive or less regulated.

“The bureau cannot draw any meaningful conclusions to inform policy until it follows up this preliminary review with the difficult work of understanding the rationale of cash- advance customers,” Fulmer said in an e-mail.

The FDIC and the OCC have teamed up to create guidance that bank examiners will apply in supervising banks, according to the person briefed on their plans. The person spoke on the condition of anonymity because the plan is not public.

Close Scrutiny

The regulators will express significant concerns about the misuse of deposit advance products and promise close scrutiny of any bank offering the loans or proposing to do so, the person said. The language will resemble rules from the early 2000s that eventually forced banks to stop partnering with payday lenders to evade state regulations.

The new rules will require banks to measure a borrower’s ability to repay the loans, the person said. They will have to disclose an annual percentage rate for the loan, wait a full billing cycle between loans and ensure that a customer pays off any loan before getting a new one, according to the person.

Consumer groups have long charged that the loans prey on low-income people by concealing costs and ensnaring them in an expensive debt cycle. They say consumers often get additional loans to cover the first one, resulting in a snowballing of the debt.

Banning Loans

For that reason, groups like the Durham, North Carolina- based Center for Responsible Lending and the Consumer Federation of American consider the loans usurious, and have argued for restricting or banning them. The CFPB has said annual interest rates can hit 521 percent.

The industry has argued the loans provide credit to a population that sometimes needs emergency small-dollar credit but is underserved by traditional forms like credit cards.

At a hearing in Birmingham, Alabama last year, Cordray promised to “dig deep” on the subject of repeat usage, and that subject forms the core of the CFPB’s new report.

The bureau used data from its supervision of storefront payday lenders to create a data set for its research. CFPB officials briefing reporters declined to specific how many companies contributed data.

A sample of 15 million storefront loans informed the agency’s research, according to the report. These lenders made a total of about 90 million loans in 2012, according to John Hecht, an analyst with Stephens Inc.

Frequent Borrowing

Nearly half -- 48 percent -- of all storefront payday borrowers had more than 10 transactions with payday lenders in the 12-month period covered by the study. Also, 14 percent of all borrowers had 20 or more loans.

The median storefront payday loan was for $350, for 14 days, and cost $15 per $100 borrowed. That made for a median annual percentage rate of 322 percent, according to the study.

At banks, the media deposit advance was $180, according to the study, while the duration and APR varied significantly. Users of these loans were also more likely to face fees from overdrawing their accounts, CFPB said.

Storefront lenders made $30.1 billion of the $48.7 billion in total payday loans made in 2012, according to Hecht, with online lenders providing the rest. The industry’s revenues were about $9.3 billion, with storefronts earning slightly more than half of that.

Online versions of payday loans require clients to have payments directly debited from their bank account. Those were not included in the report and will be the subject of more study, CFPB said.

“Consumers are at risk of using these products in ways that go beyond their intended purpose,” Cordray said. “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 expected.”