Compliance Blog

Written by Michael Coleman, Regulatory Compliance Counsel

Yesterday, the CFPB issued a white paper on payday loan and deposit advance loans products. The CFPB issued a press release on the report which provides a nice summary of the conclusions drawn in the white paper, as well as a fact sheet which contains some interesting information and statistics. Here are some interesting stats from the fact sheet regarding payday loans and deposit advance loans: 

"PAYDAY LOANS BY THE NUMBERS

•  $15 per $100 borrowed: Median fees on a typical 14-day loan
•  $350: Median size of a payday loan
•  391 percent: Annual percentage rate (APR) yields on typical $15 per $100, 14-day payday loans
•  199 days: Median number of days borrowers are indebted annually
•  10: Median number of transactions by borrowers over 12 months
• $458: Median fees incurred by a payday loan consumer

DEPOSIT ADVANCE LOANS BY THE NUMBERS

•  $10 per $100 borrowed: Typical fees on a loan
•  $180: Median size of individual advance
•  $343: Median outstanding balance of deposit advance loans
•  304 percent: APR yield using the average outstanding balance period of 12 days, assuming a fee of $10 per $100
• $3,000: Total amount that more than half (52 percent) of all deposit advance borrowers end up taking out in a year
• 149 or more: The number of days that customers with more than $3,000 in advances tend to be indebted
• 12 or less: The number of days that customers with more than $3,000 in advances tend to go between paying an old balance and taking out a new advance
• 65 percent: Percentage of consumers using deposit advances who also accrued overdraft or nonsufficient funds fees" (Emphasis in the original.)

CFPB Director Richard Cordray also issued prepared remarks on the release of the payday loans study, here is an excerpt:

“In January 2012, the Consumer Bureau added payday lenders to its supervision program on top of its existing efforts to supervise the depository institutions that offer deposit advance products. We also held a field hearing in Birmingham, Alabama, to hear directly from consumers. And we began our study on these issues, which has come to fruition with today’s white paper. The purpose of all our outreach, research, and analysis on these issues is to help us figure out the right approach to protect consumers and ensure that they will have access to a small loan market that is fair, transparent, and competitive.

As we look to next steps, we will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit. There is a clear 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. We want 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.” (Emphasis added)

It is clear that payday lending is a priority for the CFPB, we can and should expect future actions in this area. Also, if your credit union has a deposit advance loan product, make sure to take a close look at this report. 

A CFPB blog post also features an interesting infographic on consumer use of payday loans - I know I wouldn't want to pay for a taxi to go across the country!.

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STS/PAL Loans. NCUA Rules and Regulations section 701.21(c)(7)(iii) contains the current requirements for a short term, small amount loans (STS loans), which are alternatives to payday loans. Loans made pursuant to these requirements can have a rate no higher than 1,000 basis points above the agency-set loan interest rate cap, now 18 percent. Keep in mind, even with this higher interest rate, these STS loans are still much less costly than traditional payday loans.

In September 2012, NCUA issued an advance notice of proposed rulemaking (ANPR) on the agency’s payday-alternative loan (PAL) rule, which was previously referred to as STS loans. NCUA has stated that it is reviewing its regulation in part because there has been limited response from federal credit unions (FCUs), and limited numbers of FCUs issuing these loans. You can read more about the ANPR in this blog post.