The State of Lending in
America:
Debt-Trap Lending and its Impact on
American Families
Debbie Goldstein, Susanna Montezemolo, Pete Smith
October 23, 2013
Debt-Trap Lending: Overview
Common Features of Debt-Trap Products
Product
Lack of
Underwriting
Balloon
Payment
Car-Title Loans
X
X
Triple-Digit Short-Term
APR
Due Date
X
Collateral
X
Family Car
Overdraft Loans
X
X
X
X
Electronic
Access to Bank
Account
Payday Loans
X
X
X
X
Personal Check
X
Electronic
Access to Bank
Account
Bank Payday Loans
X
X
X
Debt-Trap Lending: PAYDAY LOANS
Overview
Get Payday
Loan Secured
by PostDated Check
Pay back
principal &
interest on
payday
Run out of
money before
next paycheck;
get another
payday loan to
make ends
meet
Debt-Trap Lending: PAYDAY LOANS
Key Predatory Practices Con’t
Repeat Borrowing Continues to Fuel Payday Lending
State
Florida
Time Period
June 2010-May
2011
Jan. 2011-Dec.
2011
Nov. 2010-Oct.
2011
Jan. 2011-Dec.
2011
% of loans to
% of loans to
borrowers
borrowers with
with 5+
7+ loans/year
loans/year
% of loans to
borrowers with
12+ loans/year
92%
85%
63%
93%
88%
70%
91%
84%
61%
90%
82%
53%
Average
91%
85%
62%
Average from
"Financial Quicksand"
(published in 2006)
90%
not available
62%
Kentucky
Oklahoma
South Carolina
Source: State regulator reports of annual payday loan activity reported by state-regulated
databases
Debt-Trap Lending: PAYDAY LOANS
Borrower Impact
•
•
•
•
•
•
•
•
•
Overview of non-bank payday loans:
Median loan size $350, total interest $458
Average APR: 400% +
Average 10 loans per year; 199 days per year (55%) indebtedness
Total fees of $3.4 billion, at least $2.6 billion of which are a direct
result of loan churn
Overview bank payday loans:
Median loan size: $100
Average loans per year: 13.5
Average APR 200-300%
Over one-quarter receive Social Security
Twice as likely to pay overdraft fees as bank customers as a whole
Debt-Trap Lending: PAYDAY LOANS
Additional Consequences of Default
Sources: http://bit.ly/PaydayResearch
Debt-Trap Lending: PAYDAY LOANS
Characteristics of Payday Borrowers
•
•
•
Income: CFPB found median net income of around $22,500. States
report higher average gross incomes of $30,000 in Colorado and
around $33,000 in Illinois.
Demographics: Pew: Five groups more likely to receive payday
loans: those without college degrees, renters, African Americans,
those earning under $40k, and those who are separated or
divorced.
Military Targeting: Decreased after passage of MLA. However,
some lenders engage in subterfuge and offer high-cost, abusive
open-end or installment payday loans, which are not covered
under the Act.
Debt-Trap Lending: PAYDAY LOANS
State Laws Have Caused an Industry Decline
•
Consumer-friendly changes in state laws have led to decline in
total storefront locations nationwide and decline in total fees
resulting from loan churn.
•
However, important to note that where payday loans are
offered, the debt trap causes very real harm to individuals
Debt-Trap Lending: PAYDAY LOANS
High-Cost Payday Loans Harm Families
States with Most
Storefront Locations
•
•
•
•
•
Texas
California
Florida
Tennessee
Alabama
States with Highest Total
Payday Fee Drain
•
•
•
•
•
Texas
California
Florida
Mississippi
Alabama
Debt-Trap Lending: PAYDAY LOANS
Movement to Payday Installment Loans
•
In states with little to no regulation of installment loans,
particularly those with no rate cap, payday lenders have
increasingly migrated to high-cost installment loans.
•
Payday lenders pushing debt trap payday installment proposals
in states that have significant payday regulations
•
Some states specifically authorize payday installment loans
•
These payday-like installment loans are still structured as debt
trap products
Debt-Trap Lending: PAYDAY LOANS
Effective State and Federal Action Con’t
•
•
•
Federal regulators have cracked down on bank payday lending:
o The OCC and FDIC proposed guidance directing their banks
to avoid payday lending; will be finalized soon.
o The Federal Reserve Board issued a similar supervisory
statement to its banks.
The CFPB is preparing for a major rulemaking on payday lending
that would cover all lenders, regardless of size or type.
States have been effective at enforcing state laws
Debt-Trap Lending: PAYDAY LENDING
Questions?
Debt-Trap Lending: CAR-TITLE LOANS
Overview
Borrower
Experiences $
Shortfall
Trades Car Title
(for Car Owned
Free-and-Clear)
for 300% APR
Loan
Cannot
Afford to
Repay Loan
in 30 Days
Borrowers renew loans repeatedly. Lender may
repossesses vehicle (after multiple loans)
Debt-Trap Lending: CAR-TITLE LOANS
Similarities to Payday Loans
Similarities between Payday and 30-Day Balloon Payment Car Title Loans
Features
Payday loans
30-Day Balloon Payment Car Title Loans
Typical loan size
$350
$1,042
Fee Charged
$15 per $100 borrowed
$25 per $100 borrowed
Underwriting for Affordability
None
None
Typical Loan Term
14 days, but often renewed
30 days, but often renewed
Typical APR
400% or more
300%
Collateral
Typical Number of Renewals
Post-dated check or electronic bank
account access
9
Title to vehicle (Threat of Repossession)
8
Debt-Trap Lending: CAR-TITLE LOANS
Borrower Impact
• Car-title loans are available in 21 states and cost borrowers $4.3
billion fees alone for $1.9 billion in non-churn loans.
• Car-title lenders lend a fraction of the car’s cost—26%—and use a
car as collateral yet still make loans at 300% APR.
• Repossession fees compound the problem: fees averaging $350400 and equaling half of a typical borrower’s loan balance get
tacked on when a borrower defaults.
Debt-Trap Lending: CAR-TITLE LOANS
Borrower Impact
Total Borrower Cost of a Typical 30-Day
Car-Title Loan
Average principal borrowed
Fee for first loan
$1,042
$261
8 additional renewal fees
$2,088
Total fees paid
$2,349
Total amount paid in principal and fees and principal for a $1,059 loan
$3,391
Average car value
$4,008
Debt-Trap Lending: CAR-TITLE LOANS
Borrower Impact Con’t
Repossession is Very Real—and Very Expensive
One in six (17%) of borrowers incurred a repossession fee, typically
$350-400 and averaging half of the borrower’s outstanding balance.
In New Mexico, it is much higher, with fully 60% of car-title
customers permanently losing their vehicle in 2008.
New Mexico Car Title Repossession and Vehicle Loss Rates by Customer
Year
2004
2005
2006
2007 2008
Repossession Rate by Customer
28.7% 20.2%
53.1%
47.5% 71.2%
Vehicle Loss Rate by Customer
14.6% 13.0%
41.0%
37.0% 60.1%
Source: Martin & Adams 2012
Debt-Trap Lending: CAR-TITLE LENDING
Questions?
Debt-Trap Lending: OVERDRAFTS
Overview
Transaction
Overdraws
Account
Bank Lends
Funds
Anyway
Levies HighCost Fee
Bank Repays Itself in Full at Next Deposit
Debt-Trap Lending: OVERDRAFTS
Key Predatory Features
• Debt-trap Structure
• Automatic Set-off
• Transaction Reordering
Debt-Trap Lending: OVERDRAFTS
Key Predatory Features Con’t
Transaction Reordering Example: Bad
Debt-Trap Lending: OVERDRAFTS
Key Predatory Features Con’t
Transaction Reordering Example: Worse
Debt-Trap Lending: OVERDRAFTS
Borrower Impact
• In 2011, overdraft fees cost consumers $16.7 billion.
• Two-thirds of these penalty fees are paid by account holders charged more than
six fees per year.
Debt-Trap Lending: OVERDRAFTS
Borrower Impact
Debt-Trap Lending: OVERDRAFTS
Borrower Impact
Debt-Trap Lending: OVERDRAFTS
High-Cost Overdrafts Harm Families
Debt-Trapped Borrowers = Banks’ Bread and Butter
Debt-Trap Lending: PAYDAY LENDING
Questions?
The State of Lending: Debt-Trap Lending
MAJOR MEDIA INTEREST AND COVERAGE
“Payday loans have long been huge financial traps for cashstrapped, low-income borrowers. Several states have
tightened regulations to clamp down on these ‘quick fix’
loans … But a lot more needs to be done ….” New York Times
Editorial, 9/16/13
The State of Lending:
The Final Chapters
Predatory Practices and Abuses in
Debt Buying and Debt Collection
The Cumulative Impact of Predatory
Lending
Late 2013/Early 2014
For More Information
Debbie Goldstein, Executive Vice President
debbie.goldstein@responsiblelending.org
919-313-8517
Allyn Summa, Director of Development
allyn.summa@responsiblelending.org
202-349-1888