Updated January 2014
Predatory Lending Takes Advantage of Financial Insecurity
Jeremie Greer, Director of Government Affairs
Email: jgreer@cfed.org Phone: 202.207.0125
Ezra Levin, Federal Affairs Manager
Email: elevin@cfed.org Phone: 202.466.5925
Predatory lending strips wealth from financially vulnerable families. Twelve million Americans take out
payday loans each year when they are faced with difficult financial situations. Despite preconceived notions that
theses borrowers are mostly dealing with temporary emergencies, a 2013 Pew study finds that 69% of first-time
payday borrowers used the loan to cover a recurring expense, such as utilities, credit card bills, rent or mortgage
payments, or food, while just 16% dealt with an unexpected expense, such as a car repair or emergency medical
bill. The study also found that those earning below $40,000 annually were more likely to use payday loans than
other income brackets.
Predatory loan borrowers are more likely than others to experience credit card delinquency, unpaid medical bills,
overdraft fees and bankruptcy. Fees for overdraft and insufficient funds often result when lenders cash a postdated check or automatically withdraw funds. These fees not only increase the cost of borrowing but also put the
borrower at risk of involuntary account closure, shutting them out of the mainstream banking system.
Payday loans are generally structured as short-term loans with
the typical loan size being around $346 and with a repayment
date set for the following pay day of the borrower. These loans
have a set fee and astronomical interest rates, often over 400%.
Although the loans are intended to last only two weeks, the
average borrower rolls over loans multiple times and incurs
further debt and high fees.
Deposit advances are similar to payday loans in their short-term
structure and amount, but they are provided by a borrower’s
bank or credit union. These loans are generally only made
available to customers who have direct deposit, thus there is
almost no risk for the bank. In exchange for immediate cash, borrowers authorize their bank to access to the
borrowers’ accounts and automatically withdraw repayment when the next qualifying electronic deposit
(generally a paycheck) is made. Overall, there is a large risk for the customer as the lenders can withdraw
payments regardless of the account balance, leaving the customer vulnerable to overdraft fees and the need to
reborrow to cover other expenses.
Auto title loans are similar to payday loans in their small size and high interest rates. But while creditors secure
payday loans by holding a signed check or by accessing a bank account, for auto title loans, a borrower’s car title
is signed over as collateral. If the loan is not paid back, the lender can reposses the borrower’s vehicle.
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CFED – FEDERAL POLICY BRIEF
Pawn loans, like car title loans, involve use of borrowers’ possessions as collateral. Valuables such as jewelry,
electronics and equipment are commonly pawned items. Pawn lenders generally loan the borrower an amount
that is less than the market value of their collateral, but if the loan is not paid back in a certain amount of time, the
lender may sell the pawned item at market rate. Interest rates vary for this type of loan, but are generally lower
compared to payday loans and car title loans.
Most consumers cannot repay the loans they receive in just
14 days and become repeat borrowers who pay to renew the
loans. Four in five borrowers use three or more loans per
year and account for 97% of all loans.1 This cycle of debt and
fees means that most borrowers are indebted for at least five
months during the year.2
More than 80% of payday loan borrowers cannot afford to
repay the loan in full at the end of the initial two-week term.3
Repaying the loan in full requires about one-third of an
average borrower’s paycheck.4 The Federal Deposit Insurance
Corporation (FDIC) found that 90 days was “the minimum
time needed to repay a small-dollar loan.”5
Renewals are affordable, repayment is not
$430
$55
Amount due in two weeks
to pay off $375 loan
Principal
Amount to renew $375
loan
Fee

Establish an Ability to Repay standard. Currently, most lenders in the short-term, small-dollar loan market are
not subject to any federal underwriting standards. The CFPB should develop and implement underwriting
standards that are designed to ensure that borrowers only receive loans they can afford to repay.

Establish a minimum loan term of 90 days for all short-term, small-dollar lenders. Establishing a minimum loan
term is important because the shorter the repayment period is, the more likely the borrower will have to re-borrow
rather than pay back the loan in full. In addition, Congress can ensure that the cycle of debt is broken for borrowers
by requiring all loans to be fully amortized with no balloon payments, by capping the number of loans a borrower
can have in any 12-month period and by capping the total number of loans that a borrower can have outstanding at
one time.

Prohibit mandatory check holding and automatic bank withdrawals, particularly for deposit-advance loans from
banks. In the current market, many lenders require the borrower to provide a post-dated check or written
permission to automatically withdraw money from the borrower’s bank account. This can trigger overdrafts fees
for the borrowers, effectively raising the cost of the loan.

Support research and testing of alternative consumer-friendly small-dollar loans. Some lenders, particularly
credit unions, technology-driven startups and traditional financial institutions, are working in partnership with
nonprofit service providers to develop and test affordable consumer-friendly small-dollar loan products, but are
concerned about negative reactions from regulators. The CFPB and Congress can address these concerns and create
space for innovation by supporting research and evaluation of new or experimental short-term, small-dollar loan
products, and then provide guidance to lenders about what is acceptable and what is not when developing new
products.
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CFED – FEDERAL POLICY BRIEF

Ensure that online-only lenders are subject to state short-term small-dollar lending laws. Many states have
substantially limited or effectively banned traditional payday lending by instituting usury caps, requiring
installment payments, limiting re-borrowing and other measures. However, some lenders that operate exclusively
online continue to make loans to consumers in states where the loans are illegal. The House Consumer Credit Access,
Innovation and Modernization Act (H.R. 1566) would allow online payday lenders to sidestep existing state
regulations that reign in bad payday lending practices. We urge Congress not to pass this bill. This issue can also
be addressed through rulemaking by the CFPB, which can require lenders to abide by the laws in the state where
the borrower resides.
CONTACT THE AUTHOR: Alicia Atkinson, Internal Consultant, aatkinson@cfed.org, 202.207.0123
Pew Charitable Trusts, Payday Lending in America: Who Borrows, Where They Borrow, And Why, August 2012
Pew Charitable Trusts, August 2012
3 Pew Charitable Trusts, August 2012
4 Pew Charitable Trusts, Payday Lending in America: Policy Solutions, October 2013
5 Rae-Ann Miller, Susan Burhouse, Luke Reynolds and Aileen G. Sampson, A Template for Success: The FDIC’s Small-Dollar
Loan Pilot Program, FDIC Quarterly, 2010
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