WASHINGTON–There’s a reason there are more payday loan stores in the country than McDonald’s outlets, according to the CFPB: there is a lot more money to be made.
The CFPB’s proposed rules for payday loans, auto title loans and other installment loans follow what the agency said has been “extensive research” on the products.
That research confirmed what other research has also found, that most borrowers end up in high-cost loans that seem to only grow in size even as payments are made, often leading to scarred credit for consumers and the repossession of automobiles.
In conjunction with its released proposal, the CFPB released findings of its own research on storefront payday loans, online payday loans, and auto title loans. According to the CFPB, its research found:
Storefront Payday Loans
- The median fee on a storefront payday loan is $15 per $100 borrowed, and the median loan term is 14 days, resulting in an annual percentage rate of 391% on a loan with a median amount of $350.
- Industry researchers have reported that storefront payday lenders received approximately $3.6 billion in fee revenue in 2015. The Bureau estimates that in 2015 there were 15,766 payday loan stores across 36 states. By way of comparison there were 14,350 McDonald’s fast food outlets in all of the United States in 2014.
- Four out of five payday loans are rolled over or reborrowed. In a study that tracked payday borrowers for a period of 10 months, the CFPB found that more than 80% of payday loans taken out by these borrowers were rolled over or reborrowed within 30 days, incurring additional fees with every renewal.
- Payday borrowers end up in default 20% of the time, either on their first loan or after reborrowing: Nearly half of defaults occur after a consumer reborrows three or more times. Late payments and defaults can cause consumers to rack up penalty fees from their lender, as well as additional fees from their bank.
- Consumers receiving monthly benefits are especially likely to fall into a long-term debt trap: A CFPB study found that about 20% of the time, payday loan sequences for borrowers who were paid on a monthly basis continued every single month over a 10-month period. Payday borrowers who fall into this category include elderly Americans or disability recipients receiving Social Security retirement benefits, Supplemental Security Income and Social Security Disability Insurance.
Online Payday Loans
Meanwhile, for borrowers who take out a payday loan online, the CFPB said it found a variety of different loan terms and agreements. The agency said determining the size of the online payday loan market is difficult for a number of reasons, including that many online payday lenders are not publicly traded, and many claim to be exempt from state lending laws and licensing requirements.
“One recent industry analyst estimated that online lenders received approximately $3.1 billion in fees in 2015,” the CFPB said. “Pricing for online loans tends to be more expensive than storefront payday; other researchers have found rates as high as $30 per $100 borrowed.”
The CFPB said its research of online payday lending found:
- Many online payday borrowers end up unable to pay: A CFPB study found that over 40% of online payday installment loans and more than half – 55%– of all online payday installment loan sequences experience a default.
- Half of online payday borrowers are charged an average of $185 in bank penalties: One CFPB report found that over a period of 18 months, one-half of online payday and payday installment borrowers had at least one debit attempt that failed or resulted in an overdraft covered by their bank. These borrowers incurred an average of $185 in bank penalty fees over the study period, in addition to any fees the lender might charge for failed debit attempts.
- Over one-third of online payday borrowers hit with a failed debit attempt wind up losing their account: Over the 18-month period covered by the data, 36% of accounts with a failed debit attempt from an online lender ended up being closed by the depository institution. This happened usually within 90 days of the first non-sufficient funds transaction.
Auto Installment Loans
When it comes to the other category of loans being targeted by the CFPB, auto title installment loans, the agency said it found that the typical auto title loan is about $700, and the typical annual percentage rate is about 300% for a single-payment loan and 259% for an auto title installment loan. Of the 25 states that permit some form of auto title lending, seven states permit only single-payment title loans, 13 states allow the loans to be structured as single-payment or installment loans, and five permit only title installment loans, according to the CFPB.
The same research report found there are approximately 8,000 title loan storefronts in the 25 states that permit this product.
Among the findings in the CFPB research on auto title loans:
- One-in-five single-payment auto title loan borrowers have their vehicle seized by the lender: The CFPB said it found that single-payment auto title loans have a high rate of default, and one-in-five borrowers ultimately have their car or truck seized by the lender for failure to repay.
- Over four-in-five single-payment auto title loans are not repaid in a single payment: Most borrowers of single-payment auto title loans cannot repay a loan without reborrowing. A CFPB report that followed auto title borrowers for 12 months found that more than four-in-five auto title loans made to these borrowers are renewed the day they are due. In only 12% of cases do borrowers manage to be one-and-done – paying back their loan, fees, and interest with a single payment without quickly reborrowing or defaulting.
- More than half of single-payment auto title loans become long-term debt burdens: In more than half of instances, borrowers take out four or more consecutive loans.
- Borrowers stuck in debt for seven months or more supply more than two-thirds of title loan business: More than two-thirds of title loans were generated by consumers who reborrow six or more times in quick succession. Across a rolling 12-month time period, about half of all loans are in sequences of 10 or more loans, and more than two-thirds of loans are in loan sequences of at least seven loans. In contrast, no more than 15% of all loans are in loan sequences of three or fewer loans. Of all loans made in this time period, 82% were reborrowings of the initial loan.
- Auto title installment loans lead to high default and repossession rates: In a study of lenders making auto title installment loans, the Bureau found that these loans resulted in a default 31% of the time, often after one or more refinancings. The borrower’s vehicle was seized by the lender in 11% of loan sequences.