During the past year, the CFPB has engaged in an in-depth review of short term and small dollar loans, specifically payday loans extended by non-depository institutions and deposit advance products offered by depository institutions to their customers. These are loans that are due to be repaid on the consumer’s next payday, or when a significant deposit is expected. On April 24, 2013, the CFPB published a white paper titled “Payday Loans and Deposit Advance Products” containing its findings. CFPB Director Richard Cordray has described the purpose of the CFPB study as being “to help us figure out how to determine the right approach to protect consumers and ensure that they have access to a small loan market that is fair, transparent, and competitive.”
The CFPB recognized that demand exists for small dollar credit products, and that they can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow, as they come with a high cost. However, the CFPB was concerned that if the cost and structure of a loan made it difficult to repay, these products may further impair a consumer’s finances. Thus, the CFPB focused on the problem of “sustained use” – the long-term use of a short-term, high-cost product that is repeatedly rolled over, or re-borrowed, resulting in a high level of accumulated fees.
The CFPB report concluded that two-thirds of consumers who use payday loans had seven or more such loans in a year, and that most of these consumers took new loans almost immediately after paying off their existing loans. The CFPB concluded that many consumers are unable to repay their loans in full and still meet their other expenses.
The CFPB fears that consumers may not understand the costs, benefits and risks of using these products. Although they appear to be simple instruments, there are complex features to them, and they seem to result in many consumers being indebted for longer than anticipated, and at a higher cost than they expected.
As for the lenders, the CFPB found that they were not attempting to determine if a consumer had an immediate need to take a loan for an unusual expense that the consumer could repay with the next paycheck, but rather that the lenders were simply relying on being repaid quickly, without regard to whether the consumer could afford the loan.
The CFPB stated that it will look into the effectiveness of limitations on these loans, such as cooling-off periods, in curbing sustained use and other harms. The CFPB concluded that “further attention is warranted to protect consumers…. [T]he CFPB expects to use its authorities to provide such protections.” Thus, we can expect to see some additional regulation of payday and deposit advance loans in the future.