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CFPB Payday Loan Study Warns Of Harmful Debt Cycle
WASHINGTON (4/25/13)--Some payday and deposit advance loan products can trap borrowers, putting "many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden," Consumer Financial Protection Bureau Director Richard Cordray said Wednesday.

Cordray made his remarks as the bureau released a report on those loans. The CFPB study found many borrowers face a harmful combination of loose lending standards, high costs, and risky loan structures.

Credit Union National Association Deputy General Counsel Mary Dunn said credit unions and CUNA are committed to providing safe and affordable alternatives to predatory payday lenders, and credit unions across the country have implemented various programs in order to provide individuals in their communities an alternative to high-priced payday lenders. CUNA is collating data on these efforts, she said.

Loans from federal credit unions are generally limited to an annual percentage rate of no more than 18%, although there is some flexibility under the National Credit Union Administration's short-term, small amount loan program. That program permits federal credit unions to charge an interest rate that is a maximum of 10 percentage points above the established usury ceiling at that time. For now, this amounts to an interest rate ceiling of 28%. Most credit unions offering payday loan alternatives also limit fees, provide member financial counseling, and encourage members to open savings accounts. They also in some cases provide incentives for members that switch to longer-term and lower-cost lending products.

Many borrowers use payday loan products to pay off their existing debts, the CFPB study found. This practice, when coupled with the high cost of the payday loan or advance, may make it more difficult for borrowers to pay off those debts. "It is unclear whether consumers understand the costs, benefits, and risks of using these products," the bureau report added.

The CFPB analysis of 15 million payday loans generated by storefronts in 33 states revealed:
  • A median loan amount of $350 and a mean loan size of $392;
  • A median loan term of 14 days and a mean loan term of 18.3 days; and
  • An average borrower income of $10,000 to $40,000 per year.
The study found that 18% of payday loan applicants were paid some form of federal or state public assistance. One quarter of payday loan borrowers paid $781 or more in fees over the course of a year, not counting the principal of the loan.

Agency action to address payday and loan advance issues may be in the offing, and the CFPB said it is also looking into online payday lender practices. State and federal legislators are also acting to address payday loans. (Use the resource link to read April 18 News Now story: California Is Latest Front In Larger Payday Loan Fight.)

Bank regulators are also examining banks' short-term loan products and considering strict limits on the "deposit-advance" loans that could force dramatic changes to the bank offerings, American Banker reported Wednesday. The article said the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. will impose such limit "soon." The regulators are considering such restrictions as a "cooling off" period, which would require consumers to wait a month after paying off one such loan before taking out another.

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