CFPB releases white paper on payday loans, deposit advance products

cfpbThe CFPB recently released a white paper on payday loans and deposit advance products, which found that consumers often get caught in a cycle of debt as a result of cash flow shortages.

Payday loans and deposit advance products are small-dollar loans generally intended for use to cover unexpected expenses or to bridge a cash flow gap. Most payday loans have a fixed due date and are, therefore, treated as closed-end loans under the law.

Testifying before the Senate Special Committee on Aging, David Silberman, the associate director for research, markets and regulation, said the agency found that a large percentage of consumers who use payday loan and deposit advance products “do so in a frequent and sustained way.”

“The Bureau’s study found that payday and deposit advance loans, while designed for short-term or emergency use, are leading many consumers into long-term, expensive debt burdens,” Silberman said. “For far too many consumers, payday and deposit advance loans are traps. Returning every two weeks to re-borrow the same dollar amounts at a high cost becomes a drag on the financial well-being of consumers already facing income shortfalls.”

The bureau found that nearly half of all payday borrowers took out 11 or more loans, and 52 percent of deposit advance borrowers took out advances totaling $3,000 or more. Fourteen percent of payday borrowers took out 20 or more loans, and 14 percent of deposit advance borrowers were given cash advances of more than $9,000.

Additionally, the CFPB found in its study that 65 percent of consumers who took out a deposit advance incurred at least one overdraft or non-sufficient funds fee, and the percentage increased with the usage of deposit advances.

“Due to the fact that the entire loan amount is generally repaid or due to be repaid in each pay cycle, it appears to be hard for many consumers to repay the loan and meet other expenses without experiencing another short-fall, taking out another expensive loan, and/or overdrawing an account,” Silberman said. “Financial products that trigger a cycle of debt can exacerbate the precarious balance of consumers’ financial lives.”

Silberman said the CFPB’s study underscores the need for further attention to payday loans and deposit advance products.

As the Bureau looks to next steps, we will consider how best to exercise our authorities to protect consumers while enabling access to affordable credit,” Silberman said. “There is a demand for small-dollar credit products, which can be helpful at times for consumers who use them on an occasional basis and can manage to repay them. As Director Cordray has said, ‘the Bureau will work to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures.’”

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