New efforts to curb the ‘debt trap’ of payday lending

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The following day, two regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation announced new regulatory actions to address potential consumer risks associated with the products as well as the safety and soundness of operations.  The two regulators’ actions are very similar, focusing on a borrower’s ability to repay while meeting ongoing expenses, safe and sound underwriting, and limiting the numbers of loans.
According to Thomas J. Curry, OCC Comptroller, “We have significant concerns regarding the misuse of deposit advance products.”
OCC supervises all national banks and federal savings associations with combined assets of $10.1 trillion, representing 71 percent of total U.S. commercial banking assets, according to its most recent annual report.
Similarly, FDIC Chairman Martin J. Gruenberg said, “The proposed supervisory guidance released today reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers.”
FDIC insures deposits in more than 7,000 banks and savings associations.
According to CFPB’s findings these actions could benefit about 12 million households that borrow payday loans each year, a potential reduction in the $7 billion in annual fees that are generated by more than 18,200 payday storefronts across the country.
CFPB’s report examined 15 million payday loans made during a 12-month period, covering more than 90 percent of the market. Both storefront and bank versions exposed consumers to the risk of being caught in a revolving door of debt. What was sold as a short-term bridge became an expensive, long-term loan. Risky loan structure, loose lending standards, sustained usage and accompanying high costs were cited as characteristics of both products.
According to the report, 75 percent of storefront payday lending revenue is derived from borrowers taking out 10 or more loans a year. For 68 percent of these borrowers, their annual income is $30,000 or less.
Among the findings:
•Nearly one-in-four borrowers received government assistance or benefits such as Social Security, disability, unemployment or welfare benefits;
•The average borrower took 11 loans in the 12-month period, paying $574 in fees for $392 in credit; and
•Despite lender attempts to reject the use of an annual percentage rate (APR), a two-week loan with a $15 fee per $100 borrowed is actually a 391 percent APR.
On banks’ deposit advance loans, CFPB also found that:
•Borrowers usually had much lower average balances than other bank customers, suggesting a smaller financial cushion to cover unexpected shortfalls;
•Nearly two-thirds of consumers also incurred additional fees such as overdraft or non-sufficient funds;
•The annual percentage rate of interest was 304 percent; and
•Most borrowers remained in debt for at least 149 days.
Commenting on these findings, Director Cordray said, “We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures.”
Earlier this month and in an effort to heighten Capitol Hill awareness of payday lending’s debt trap, Congressman Conyers convened a briefing that included representatives from the NAACP, Native  Community Finance, Consumer Federation of America, Pew Charitable Trusts, and the Center for Responsible Lending.
Also this month, CRL and National People’s Action delivered to regulators more than 150,000 petitions urging the officials to crack down on high-cost payday lending. Also part of the petition drive were CREDO and Green America and Americans for Financial Reform.

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