Research by the Center for Responsible Lending (CRL) concludes that payday loans are serious threats to the financial health of borrowers.
The latest chapters of CRLs research series, The State of Lending in America, covering payday loans find the products are creating a cycle of debt where too many borrowers take out a loan, ostensibly pay it back, run out of money and then have to assume additional loans to afford their living expenses.
While payday loans are marketed as a convenient way to handle unexpected emergencies, the majority of borrowers use the loans for everyday expenses. Borrowers nationwide pay more than $3.4 billion in fees. What's more, at least two-thirds of these fees approximately $2.6 billion - are the direct result of payday loan churning or rapid and successive re-borrowing, the CRL research states.
Whether they receive the loans online, in storefronts or through banks, the vast majority of borrowers cannot both repay the loan and cover all their basic living expenses until their next payday, states the report. Payday loans create a debt treadmill that makes struggling families worse off than they were before they received a payday loan.
Twenty-two states have enacted laws to curb or eliminate the impact of payday lending. In recent years, states with varying locales and demographics have rejected payday lendings triple digit rates and imposed rate caps. In 2006 enactment of the Military Lending Act created a 36% rate limit and prohibited the holding of a post-dated check from active-duty military and their families.
Now, more payday-related developments are occurring at the federal level.
Two regulators, the Federal Deposit Insurance Corporation and the Office of the Comptroller, are developing guidance to crack down on payday lending by banks. The Consumer Financial Protection Bureau (CFPB) recently issued a report that reviewed more than 15 million accounts. CFPB is considering rules to address its own finding that the typical borrower is indebted for nearly 200 days in a year. The payday lending industry fired back soon after that report was issued.
But 29 states still have no substantive restriction on payday lending, according to the research.
Payday lenders in just 10 states collect 83% of all fees. Nationwide, there are 16,341 store locations; but only nine major operators control nearly 50% of these stores. Texas and California lead the list of states with the most payday lending activity.
In the area of bank payday lending, CRL found that:
Bank payday borrowers are two times more likely to incur overdraft fees than are bank customers as a whole;
More than one-quarter of bank payday borrowers are Social Security recipients; and
Bank payday loans carry an annual percentage rate that averages 225-300%.