Akron Beacon Journal: Convenient Trap
The Pew Charitable Trusts issued a report on payday-loan borrowers in February that said: “The choice to use payday loans is largely driven by unrealistic expectations and by desperation. Borrowers perceive the loans to be a reasonable short-term choice but express surprise and frustration at how long it takes to pay them back.”
Federal oversight agencies weighed in this week, none too soon. Their analyses of the lucrative business echo the Pew report on how a short-term choice, marketed as a convenient option in an emergency, more often than not turns into a long-term trap. On Wednesday, the Consumer Financial Protection Bureau released its findings after examining 15 million payday loans and more than 100,000 bank advances over a 12-month period. The Federal Deposit Insurance Corp. and the Office of the Comptroller of Currency followed on Thursday with proposed guidelines for deposit advances, the banks’ version of payday loans.
The consumer-protection bureau found the typical borrower has full-time or part-time employment, with annual income in the $10,000 to $40,000 range. During the 12-month period, two-thirds of the borrowers made seven or more loan transactions, most frequently opening a new loan within a day of closing the previous one. The median borrower made 10 transactions, paid $458 in fees above the loan principal and remained in debt more than half of the year. The bureau found that for banks the advantage of first access to a consumer’s electronic deposits offers little incentive to consider a borrower’s ability to repay a loan.
Among the FDIC’s proposed guidelines, a bank must review the ability to repay, establish a “cooling period” of one month between loans and craft underwriting policies for payday loans approved by its board of directors.
The majority of payday borrowers do not use the loans to cover an occasional gap, as promoters claim, but to manage chronic shortfalls. Whether the loan comes from a storefront operation or a bank, high fees with annualized percentage rates approaching 400 percent and the terms of repayment (usually in full with the next pay) exploit consumers who have few options.
No one disputes there is a thriving market for small, readily available, short-term loans. But as the federal agencies stress, the market needs to be fair, transparent and competitive.