As part of its Making Ends Meet survey, the CFPB issued a report last week on how consumers use payday, auto title, and pawn loans (“alternative financial services” or “AFS”) and the other sources of credit available to them. Consumers surveyed include only those with a traditional credit record and the sampling focused on consumers with lower credit scores, recent credit delinquencies, or living in rural areas.
Many consumers who obtained an AFS product in 2019 were found to still be using AFS products in 2020. The 2019 survey asked consumers whether they had obtained an AFS product within the previous 6 months and found the following use rates: 4.4% for payday loans (defined as “a loan that you must repay, make a payment on, or rollover on your next payday”), 2% for auto title loans and 2.5% for pawn loans. Of those who used an AFS product in the past six months, at the time of the survey 63% still owed on a payday loan, 83% still owned on an auto title loan and 73% still owed on a pawn loan and 48% percent of consumers specifically reported rolling over at least one payday loan in the previous six months. The 2020 survey increased the lookback period to 12 months and found the following use rates: 5.7% for payday loans, 2.9% for auto title loans and 2.5% for pawn loans. The survey also found that 52% of consumers reporting use of a payday loan in 2019 also used one in 2020 while only 3.5% of consumers who did not use payday loans in 2019 reported using one in 2020.
The report indicates 74% of AFS users in the previous year reported experiencing an income or expense shock in that same year as compared with only 57% of non-AFS users. The report also indicates that in June 2019, 77% of AFS users reported experiencing a financial shock and having difficulties paying a bill or expense, compared to 29% of non-AFS users. Further, 10% percent of AFS users reported difficulties paying a bill or an expense without experiencing a financial shock. With regard to the impact on the liquidity of consumers who reported difficulty paying a bill due to an adverse event, the report states after paying for the expense, AFS users had a median deficit of $800, compared to a median of $435 in available funds for non-AFS users.
The report finds that over 60% of AFS users had poor or very poor credit scores which affects their options for paying bills or expenses. Of those AFS users who reported applying for credit in the past year, 60% reported being turned down or offered less credit than applied for. Of those AFS users who had not applied for credit in the past year, 48% reported they had not done so because they expected the application to be declined. Of those borrowers who had obtained a loan in the past six months and still owed money as of June 2019, 63% of AFS users reported having a credit card but only 28% of payday loan borrowers had at least $300 in available credit in June 2019, as did 33% of auto title borrowers and 16% of pawn borrowers.
The CFPB concludes the report with the observation that while relatively few consumers use AFS products, the consumers who do use those products do so repeatedly. The report includes additional details on the demographics of AFS users, financial shocks and other available payment options.
While the data on which the report was based was gathered by the Kraninger administration in June 2019 and June 2020 as part of the first two waves of the CFPB’s “Making Ends Meet” survey, it should nevertheless be viewed in the context of Acting Director Uejio’s March 23rd statement that the “vast majority of [the small dollar lending] industry’s revenue came from consumers who could not afford to repay their loans, with most short-term loans in reborrowing chains of 10 or more” and that the CFPB is “acutely aware of consumer harms in the small dollar lending market, and is particularly concerned with any lender’s business model that is dependent on consumers’ inability to repay their loans.” Accordingly, despite rescission of the “ability to repay” provisions of the CFPB’s rule on “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” the report is yet another data point indicative of the CFPB’s belief that “the harms identified by the 2017 rule still exist” and a warning to small dollar lenders of its intent to address those harms “through vigorous market monitoring, supervision, enforcement, and, if appropriate, rulemaking.”