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CFPB: 80% of payday loans renewed or followed by more loans
WASHINGTON (3/26/14)--More than 80% of short-term loans taken out at payday lenders are rolled over or followed within two-weeks by another loan, according to a new Consumer Financial Protection Bureau report.
The report got a public unveiling Tuesday at a payday lending field hearing in Nashville, Tenn.
Click to view larger image The CFPB slide pictured above shows the number of loan sequences per new borrower. According to the bureau, defaulters are more likely than repayers and renewers to have just a single loan sequence. Defaulting on a loan can preclude a consumer from borrowing again, the bureau noted.
CFPB Director Richard Cordray said the bureau study "again confirms that payday loans are leading many consumers into longer-term, expensive debt burdens."
While the CFPB believes that some payday loans should continue to be available, it is expected that the bureau will issue new restrictions on their practices.

"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," Cordray added in his written remarks.

The bureau said same-day renewals were less frequent in states with mandated cooling-off periods, but also noted that 14-day renewal rates in states with cooling-off periods were nearly identical to states without those limitations.
The CFPB analysis found that:
  • 15% of new loans are followed by a loan sequence at least 10 loans long;
  • Half of all loans are in a sequence at least 10 loans long;
  • Increases in loan amounts are more likely to occur early in a loan sequence;
  • Few borrowers amortize, or have reductions in principal amounts, between the first and last loan of a loan sequence;
  • Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates;
  • Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer; and,
  • The majority of monthly borrowers are government benefits recipients.
The field hearing also featured testimony by consumer groups. Industry representatives and the general public also were provided an opportunity to speak at the session.

The CFPB announced in November 2013 that it would accept complaints on payday lenders and later that month announced its first enforcement action against a payday lender.
The Credit Union National Association highlights credit unions as a consumer-friendly alternative to the high-cost payday loan industry. Around 20% of credit union members use payday lenders.

A May 15 webinar (see resource link) from CUNA will examine why payday lending has increased in recent years and illustrate how to develop effective credit union loan alternatives to payday loans.

For the full CFPB study, use the first resource link.

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