The State of Lending in America:

Debt-Trap Lending and its Impact on American Families

Debbie Goldstein, Susanna Montezemolo, Pete SmithOctober 23, 2013

Debt-Trap Lending: OverviewCommon Features of Debt-Trap Products

Product Lack of Underwriting

Balloon Payment

Triple-Digit APR

Short-Term Due Date Collateral

Car-Title Loans X X X X Family Car

Overdraft Loans X X X XElectronic

Access to Bank Account

Payday Loans X X X X Personal Check

Bank Payday Loans X X X XElectronic

Access to Bank Account

Debt-Trap Lending: PAYDAY LOANS Overview

Get Payday Loan Secured by Post-Dated Check

Pay back principal & interest on payday

Run out of money before next paycheck; get another payday loan to make ends meet

Debt-Trap Lending: PAYDAY LOANSKey Predatory Practices Con’t

Repeat Borrowing Continues to Fuel Payday Lending

State Time Period

% of loans to

borrowers with 5+

loans/year

% of loans to borrowers with 7+

loans/year

% of loans to borrowers with 12+ loans/year

Florida June 2010-May 2011 92% 85% 63%

Kentucky Jan. 2011-Dec. 2011 93% 88% 70%

Oklahoma Nov. 2010-Oct. 2011 91% 84% 61%

South Carolina Jan. 2011-Dec. 2011 90% 82% 53%

Average   91% 85% 62%Average from

"Financial Quicksand"

(published in 2006)

  90% not available 62%

Source: State regulator reports of annual payday loan activity reported by state-regulated databases

Debt-Trap Lending: PAYDAY LOANS Borrower Impact

Overview of non-bank payday loans:• Median loan size $350, total interest $458• Average APR: 400% +• Average 10 loans per year; 199 days per year (55%) indebtedness• Total fees of $3.4 billion, at least $2.6 billion of which are a direct

result of loan churn

Overview bank payday loans:• Median loan size: $100 • Average loans per year: 13.5• Average APR 200-300%• Over one-quarter receive Social Security• Twice as likely to pay overdraft fees as bank customers as a whole

Sources: http://bit.ly/PaydayResearch

Debt-Trap Lending: PAYDAY LOANSAdditional Consequences of Default

Debt-Trap Lending: PAYDAY LOANSCharacteristics of Payday Borrowers

• Income: CFPB found median net income of around $22,500. States report higher average gross incomes of $30,000 in Colorado and around $33,000 in Illinois.

• Demographics: Pew: Five groups more likely to receive payday loans: those without college degrees, renters, African Americans, those earning under $40k, and those who are separated or divorced.

• Military Targeting: Decreased after passage of MLA. However, some lenders engage in subterfuge and offer high-cost, abusive open-end or installment payday loans, which are not covered under the Act.

• Consumer-friendly changes in state laws have led to decline in

total storefront locations nationwide and decline in total fees resulting from loan churn.

• However, important to note that where payday loans are offered, the debt trap causes very real harm to individuals

Debt-Trap Lending: PAYDAY LOANSState Laws Have Caused an Industry Decline

Debt-Trap Lending: PAYDAY LOANSHigh-Cost Payday Loans Harm Families

States with Most Storefront Locations

• Texas• California• Florida• Tennessee• Alabama

States with Highest Total Payday Fee Drain

• Texas• California• Florida• Mississippi• Alabama

Debt-Trap Lending: PAYDAY LOANSMovement to Payday Installment Loans

• In states with little to no regulation of installment loans, particularly those with no rate cap, payday lenders have increasingly migrated to high-cost installment loans.

• Payday lenders pushing debt trap payday installment proposals in states that have significant payday regulations

• Some states specifically authorize payday installment loans

• These payday-like installment loans are still structured as debt trap products

Debt-Trap Lending: PAYDAY LOANSEffective State and Federal Action Con’t

• Federal regulators have cracked down on bank payday lending:o The OCC and FDIC proposed guidance directing their banks

to avoid payday lending; will be finalized soon.o The Federal Reserve Board issued a similar supervisory

statement to its banks. • The CFPB is preparing for a major rulemaking on payday lending

that would cover all lenders, regardless of size or type.• States have been effective at enforcing state laws

Debt-Trap Lending: PAYDAY LENDING

Questions?

Debt-Trap Lending: CAR-TITLE LOANS Overview

Borrowers renew loans repeatedly. Lender may repossesses vehicle (after multiple loans)

Borrower Experiences $ Shortfall

Trades Car Title (for Car Owned Free-and-Clear) for 300% APR Loan

Cannot Afford to Repay Loan in 30 Days

Debt-Trap Lending: CAR-TITLE LOANSSimilarities to Payday Loans

Similarities between Payday and 30-Day Balloon Payment Car Title Loans

Features Payday loans 30-Day Balloon Payment Car Title Loans

Typical loan size $350 $1,042

Fee Charged $15 per $100 borrowed $25 per $100 borrowed

Underwriting for Affordability None None

Typical Loan Term 14 days, but often renewed 30 days, but often renewed

Typical APR 400% or more 300%

Collateral Post-dated check or electronic bank account access Title to vehicle (Threat of Repossession)

Typical Number of Renewals 9 8

Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact

• Car-title loans are available in 21 states and cost borrowers $4.3 billion fees alone for $1.9 billion in non-churn loans.

• Car-title lenders lend a fraction of the car’s cost—26%—and use a car as collateral yet still make loans at 300% APR.

• Repossession fees compound the problem: fees averaging $350-400 and equaling half of a typical borrower’s loan balance get tacked on when a borrower defaults.

Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact

Total Borrower Cost of a Typical 30-Day Car-Title Loan

Average principal borrowed $1,042

Fee for first loan $261

8 additional renewal fees $2,088

Total fees paid $2,349

Total amount paid in principal and fees and principal for a $1,059 loan $3,391

Average car value $4,008

Debt-Trap Lending: CAR-TITLE LOANSBorrower Impact Con’t

Repossession is Very Real—and Very Expensive

One in six (17%) of borrowers incurred a repossession fee, typically $350-400 and averaging half of the borrower’s outstanding balance.

In New Mexico, it is much higher, with fully 60% of car-title customers permanently losing their vehicle in 2008.

New Mexico Car Title Repossession and Vehicle Loss Rates by CustomerYear 2004 2005 2006 2007 2008

Repossession Rate by Customer 28.7% 20.2% 53.1% 47.5% 71.2%Vehicle Loss Rate by Customer 14.6% 13.0% 41.0% 37.0% 60.1%

Source: Martin & Adams 2012

Debt-Trap Lending: CAR-TITLE LENDING

Questions?

Debt-Trap Lending: OVERDRAFTS Overview

Bank Repays Itself in Full at Next Deposit

Transaction Overdraws Account

Bank Lends Funds Anyway

Levies High-Cost Fee

Debt-Trap Lending: OVERDRAFTSKey Predatory Features

• Debt-trap Structure

• Automatic Set-off

• Transaction Reordering

Debt-Trap Lending: OVERDRAFTSKey Predatory Features Con’t

Transaction Reordering Example: Bad

Debt-Trap Lending: OVERDRAFTSKey Predatory Features Con’t

Transaction Reordering Example: Worse

Debt-Trap Lending: OVERDRAFTS Borrower Impact

• In 2011, overdraft fees cost consumers $16.7 billion.

• Two-thirds of these penalty fees are paid by account holders charged more than six fees per year.

Debt-Trap Lending: OVERDRAFTS Borrower Impact

Debt-Trap Lending: OVERDRAFTS Borrower Impact

Debt-Trap Lending: OVERDRAFTSHigh-Cost Overdrafts Harm Families

Debt-Trapped Borrowers = Banks’ Bread and Butter

Debt-Trap Lending: PAYDAY LENDING

Questions?

The State of Lending: Debt-Trap LendingMAJOR MEDIA INTEREST AND COVERAGE

“Payday loans have long been huge financial traps for cash-strapped, low-income borrowers. Several states have tightened regulations to clamp down on these ‘quick fix’ loans … But a lot more needs to be done ….” New York Times Editorial, 9/16/13

The State of Lending:The Final Chapters

Predatory Practices and Abuses in Debt Buying and Debt Collection

The Cumulative Impact of Predatory Lending

Late 2013/Early 2014

For More Information

Debbie Goldstein, Executive Vice Presidentdebbie.goldstein@responsiblelending.org

919-313-8517

Allyn Summa, Director of Developmentallyn.summa@responsiblelending.org

202-349-1888