Expensive Installment Loans: No improvement over payday loans


By 2013, a handful of banks were withdrawing millions of dollars annually from customer accounts through “direct deposit prepayments” — products with average annual interest rates of up to 300%. Like in-store payday loans, the deposit advance has been marketed as an occasional bridge to a consumer’s next payday. But like window payday loans, these banking products lock borrowers in long-term, debilitating debt.

But banks lost interest in deposit prepayments thanks to 2013 regulatory guidance that instructed financial institutions to rate borrowers’ ability to repay their loans based on income and expenses. Now, amid a storm of deregulation in Washington, the banking industry is urging regulators to get them back in the payday loan game. they should to know better.

In a recent policy document, the The American Bankers Association called the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to withdraw its 2013 guidelines, the FDIC to withdraw various guidelines protecting overdrafts, and the Consumer Financial Protection Bureau to withdraw its proposed small-dollar lending rule. “If completed as proposed, the [CFPB] The rule would limit, if not eliminate, banks’ ability to make small dollar loans,” the ABA said.

Meanwhile, some banks are also supporting a proposal by the Pew Charitable Trusts to provide certain exemptions from CFPB insurance requirements for installment loans, capping monthly payments at 5% of income, claiming this is necessary to allow banks to meet the needs can cover loans in small dollars . But this plan won’t prevent consumer debt traps.

When researchers and consumer advocates call for restrictions on payday loans, they face two main obstacles. One is the claim that triple-digit interest rates are irrelevant because the loans are short-term; The other is that small-dollar lenders provide access to affordable credit in underserved communities.

But the fact that payday loans are actually designed and work to lure borrowers into long-term debt refutes these arguments. The CFPB found that the average payday loan borrower gets stuck in 10 loans per 12-month period. Our own research showed that the banks’ payday loans were just as bad or worse. In 2012, we found that the average borrower of a payday loan product received 13.5 loans per year from a bank. Over half of the borrowers had 10 loans a year. Over 36% had more than 20 and some more than 30.

The typical payday borrower is unable to meet their most basic obligations and repay the payday loan debt within two weeks. Within one payment period, families may have enough money to either pay off their payday loan or cover basic expenses, but not both. So the lender, who has direct access to the borrower’s checking account as a condition of lending, overturns the loan until the next payday, again costing the borrower a hefty fee. The result is a series of expensive, unpayable debts. This is not a service for low-income communities; It’s a ticket to financial ruin and increases the risk of more late bills, closed bank accounts and bankruptcy.

As banks scramble to get back into deposit advance products, another misguided push is afoot that could penalize banks’ ability to lend expensive consumer loans. Despite support from Pew, which argues that expensive installment loans can be structured to be affordable without considering both income and expenses when determining a borrower’s ability to repay, this plan creates a loophole for banks to recover unaffordable, granting high-interest loans. This includes the banks that used to make advance loans — some of which are among the biggest banks pushing this plan — and those that didn’t.

The suggestion is that the CFPB would rule out any Loans where monthly payments are up to 5% of the consumer’s total income (before taxes) from a requirement that the lender determine the borrower’s ability to repay, which is the key requirement in the CFPB’s proposal. This proposal was also floated to the Office of the Comptroller of the Currency, proposing that the OCC exempt these loans from its underwriting standards as well.

But this loophole ignores a family’s expenses for a population that already usually struggles to shoulder them. Consider a family of four with a federal poverty line of $24,300 annually, $2,025 monthly. A standard 5% payment on income would assume the family has an additional $101 each month or $1,215 annually to spare to service installment loan debt. Even under the best of circumstances, this will often not reflect reality. Existing Credit Performance Data of installment loans also show that these loans will often not be affordable. For these reasons, this proposed gap rejected by almost all national consumer and civil rights organizations.

With no interest rate caps and direct access to the borrower’s bank account to receive payments (regardless of whether the borrower can afford groceries or not), unaffordable installment loans force borrowers into long-term debt, with the same damaging consequences as traditional loans.

Low-income families in states that don’t allow payday loans report that they have myriad strategies for getting to their next payday when they’re short on cash, including credit cards that are far cheaper than payday loans, utility payment plans, and loans and credit counseling from nonprofit organizations. The last thing they need as former payday borrowers attestis an expensive debt trap that will make their situation worse.

Payday lenders will not stop making their false arguments. But the CFPB should finalize a strict rule requiring a determination of repayability for all payday loans, high-cost installment loans and auto title loans — regardless of who originates them. And regulators shouldn’t allow banks to make unpayable payday or installment loans.

The 15 states (and DC) that have banned or never approved payday credit only kept payday lenders out of their states after fierce battles between a well-heeled industry and those fighting to protect working families, veterans, the elderly and lowly -Income communities of color from 300% interest loans. If banks try to get back into this business, they will face the same determined resistance that drove them away in 2013.

And for a good reason. Payday loans are harmful. Those bank bosses who want to be decent to their customers should stay away.

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