Predatory Lenders Hook Consumers in ‘Debt Traps’
Policy + Politics

Predatory Lenders Hook Consumers in ‘Debt Traps’

REUTERS/Joshua Roberts

More than half of the loans made by payday lenders in the U.S. start out as one loan, but turn into a series of 10 or more financially draining transactions, generating fees for the lender at every step. The finding was reported by the Consumer Financial Protection Bureau, which has been examining the industry in advance of considering new rules that could restrict the way lenders do business.

More than 80 percent of all loans made by payday lenders are rolled over into another loan, the agency found in an analysis of some 12 million such loans made by lenders in 33 states.

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Payday lenders generally make small loans, usually in the hundreds of dollars, and require borrowers to pay back their loan with their next paycheck. The fee for the loan is generally about 15 percent of the amount borrowed. The study found that about 35 percent of first-time borrowers repay their loan when it is due. However, the bulk of payday lenders’ business is from borrowers who roll over their balance into another loan time after time, or take out a second loan to repay the first.

“Our study today again confirms that payday loans are leading many consumers into longer-term, expensive debt burdens,” said CFPB Director Richard Cordray at an event in Nashville on Tuesday. “Our research confirms that too many borrowers get caught up in the debt traps these products can become. The stress of having to re-borrow the same dollars after already paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”

Noting the high number of loans that are part of long sequences, he said, “From this finding, one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan.”

Related: Rough Week for an Agency Targeted by the GOP

Cordray said that his agency is nearing the end of its examination of the industry, and that CFPB is planning to issue new rules that will bring “needed reform” to payday lending.

Consumer groups cheered the CFPB report.

“Congress gave CFPB broad authority over payday lenders because it was concerned about the well-being of American families,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. “Now, this CFPB report confirms with rigorous analysis that payday loans are debt traps for the vast majority of consumers and their families. We look forward to CFPB using its findings as a basis for a strong rule protecting consumers from predatory payday lending.”

Related: Critics Say Consumer Bureau Is an Overreaching Monster

Payday lending representatives criticized the agency for not working with the industry during its investigation.

In a statement released last night, before the CFPB report was available, the Community Financial Services Association of America, which represents small dollar, short-term lenders, said, “We regret the Bureau, yet again, did not engage the industry in their process and neglected to take into account the vast experience and understanding our members possess from having served consumers in this market over the past 15 years.” 

The organization did not have a comment on the report on Tuesday morning.

“We’re taking a close look at the report, methodology and the conclusions they are drawing,” said Amy Cantu, director of communications and research for CFSA. Cantu said her organization would likely have further comments on the CFPB’s findings at a later date.

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