New Report: Payday Loans are gateway to long-term debt

31 03 2011

New CRL Research: Average “short term” loan keeps borrowers in debt for 212 days per year

Center for Responsible Lending
March 31, 2011

Although payday loans are marketed as quick solutions to occasional financial shortfalls, new research from the Center for Responsible Lending shows that these small dollar loans are far from short-term.  Payday Loans, Inc., the latest in a series of CRL payday lending research reports, found that payday loan borrowers are indebted for more than half of the year on average, even though each individual payday loan typically must be repaid within two weeks.

CRL’s research also shows that people who continue to take out payday loans over a two-year period tend to increase the frequency and extent of their debt. Among these borrowers, a significant share (44 percent), ultimately have trouble paying their loan and experience a default. The default results in borrows paying more fees from both the payday lender and their bank.

Federal banking regulators have voiced their concerns about long-term payday loan usage. For example, the Federal Deposit Insurance Corporation (FDIC) has stated that it is inappropriate to keep payday borrowers indebted for more than 90 days in any 12 month period. Yet CRL determined that the average borrower with a payday loan owed 212 days in their first year of payday loan use, and an average of 372 days over two years.

“This new report finds even more disturbing lending patterns than our earlier reports”, said Uriah King, a senior vice-president with CRL. “Not only is the actual length of payday borrowing longer, the amount and frequency grows as well. The first payday loan becomes the gateway to long-term debt and robs working families of funds available to cover everyday living expenses.” 

CRL tracked transactions over 24 months for 11,000 borrowers in Oklahoma who took out their first payday loans in March, June or September of 2006. Oklahoma is one of the few states where a loan database makes this kind of analysis possible. CRL then compared these findings with available information from regulator data and borrower interviews in other states.   

According to Christopher Peterson, a University of Utah law professor and nationally-recognized consumer law expert, “The Center for Responsible Lending’s latest research on multi-year, first-use payday loan borrowers provides conclusive evidence that payday loans are not short-term debts. Rather, their data shows payday loans evolve into a spiral of long-term, recurrent, and escalating debt patterns.”  

Rev. Dr. DeForest Soaries, pastor of First Baptist Church of Lincoln Gardens in Somerset, New Jersey and profiled in Almighty Debt, a recent CNN documentary, also commented on the new research findings: “Reputable businesses build their loyal clientele by offering value-priced products and services. Customers choose to return to these businesses. But payday lenders build their repeat business by trapping borrowers into a cycle of crippling debt with triple digit interest rates and fees. Lenders should be completely satisfied with a 36 percent interest cap.”

To address the problem of long-term payday debt, CLR recommends that states end special exemptions that allow payday loans to be offered at triple-digit rates by restoring traditional interest rate caps at or around 36 percent annual interest. A 36 percent annual interest rate cap has proven effective in stopping predatory payday lending across seventeen states and the District of Columbia. Active duty service members and their families are also protected from high-cost payday loans with a 36 percent annual cap.

In addition, CRL notes that both states and the new Consumer Financial Protection Bureau at the federal level can take other steps such as limiting the amount of time a borrower can remain indebted in high-cost payday loans; and requiring sustainable terms and meaningful underwriting of small loans generally. 

Further information on the report is available at: http://www.responsiblelending.org/payday-lending/research-analysis/payday-loans-inc.html.

For more information: Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; or Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

# # #

About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation’s largest community development financial institutions.

Advertisements




Public Hearings Set to Talk about Payday Lending

6 10 2010

What’s the Real Cost of Payday Lending in Kentucky?

Public Invited to Speak, Listen & Learn at Local Hearings

Kentucky’s Consumers’ Advisory Council along with the Attorney General’s Office of Consumer Protection has scheduled three public hearings to gather facts and take public testimony on the issue of payday lending.  The hearings are free and open to the public.

KCRL expects Kentucky’s General Assembly to deal with payday lending practices again in it’s 2011 Regular Session.

Read more about the economic cost of payday lending in your county at http://bit.ly/bmwxyU

Louisville – October 13, 2010  2:00-4:00 p.m.

Location: St. Michael’s Catholic Church, 12709 Taylorsville Road ~ 40299

Lexington – October 27th  2:00-4:00 p.m.

Location: Shiloh Baptist Church, 237 East 5th Street ~ 40508

Newport – November 9   1:00 -3:00 p.m.

Location: Brighton Center, 741 Central Avenue ~ 41071

The Consumers’ Advisory Council has invited testimony from consumers, the Department of Financial Institutions, the Kentucky Coalition for Responsible Lending, and representatives from the payday loan industry.

The Kentucky Coalition for Responsible Lending is a diverse, statewide coalition of more than 60 organizations representing hundreds of thousands of Kentuckians.  KCRL supports new law capping payday loan interest rates at 36%  just as Congress passed for our nation’s military families.





KCRL Releases County by County Payday Loan Study

23 02 2010

New Report Details Economic Cost of Payday Loans in Kentucky Counties

Payday lending debt trap strips Kentucky consumers and their communities, urban or rural, of millions of dollars each year.

KCRL KY Payday Lending ReportThe Kentucky Coalition for Responsible Lending (representing 64 KY organizations) has now released a year-long study on the economic impact of payday lending across the state’s 120 counties. While House Bill 381 remains locked in House Banking & Insurance Committee, KCRL continues to call on Chair Representative Jeff Greer to give the bill a fair hearing.

KCRL’s report, “The Debt Trap in the Commonwealth: The Impact of Payday Lending on KY Counties,” is the first comprehensive look at documenting the economic damage of payday lending in Kentucky counties.

KCRL Chairperson, Amy Shir, said the report delivers concrete facts supporting a 36% cap on payday loans. Shir added, “The people of Kentucky and their communities will be better served by limiting payday loans to a 36 percent rate cap.  It is the right thing to do and is an example of sound public policy.”

Key Findings Include:

• The economic impact of payday lenders is costly in both rural and urban communities. Louisville Metro was home to 132 lenders who collected nearly $27 million in predatory fees in 2008, but the magnitude of impact is even stronger in Mason County, home to less than 10,000 people and 8 payday lenders who collected $1.6 million in predatory fees in 2008.

• The majority of payday lenders in Kentucky are nationally owned and their profits leave the state.

• Payday lenders locate in places where people are most likely to need access to small-dollar short term credit—but low- to moderate-income families are also least likely to be able to repay the loans within the two-week term.

KCRL supports House Bill 381 because it will bring Kentucky in line with the same protections Congress passed to protect military families with a 36% interest cap on most loans.  The county data in this report strongly suggests that Kentucky should consider this an economic priority during the deepest national recession since the Great Depression.

According to Reverend J. Richard Sullivan with CLOUT, “Payday loans violate the biblical mandate against usury, especially when committed against the poor. KCRL represents tens of thousands of Kentuckians who are calling for a 36% rate cap on payday loans—in fact, the largest gathering of citizens last year in Louisville to address any community problem (nearly 1600 people affiliated with CLOUT) was to call for this rate cap—and CLOUT will gather another 2000 in Louisville next month to call for it again.”

The Coalition’s report “The Debt Trap in the Commonwealth: The Impact of Payday Lending on KY Counties” was distributed to all members of the General Assembly and Governor Steve Beshear. The report is expected to assist state Representative Darryl T. Owens (D – 43) and his co-sponsors’ work to pass House Bill 381 calling for a new 36% APR cap on payday cash advance loans.





Live on KET’s Kentucky Tonight Show – Monday, Feb. 15th at 8:00 pm (ET)

14 02 2010

KET’s Kentucky Tonight program with host Bill Goodman will discuss payday loans and House Bill 381

KET's Bill Goodman

KET's - Bill Goodman

 

Join host Bill Goodman and scheduled guests:

State Rep. Darryl Owens, D-Louisville

State Rep. Bill Farmer, R-Lexington

Amy Shir, chair of the Kentucky Coalition for Responsible Lending

Tommy Moore, executive vice president of the Community Financial Services Association of America

KET’s Kentucky Tonight – Monday , Feburary 15th at 8:00 pm to 9:00 (ET)

KET's Kentucky Tonight

Viewers with questions and comments may send e-mail to kytonight@ket.org, including first and last name and town or county for messages to be considered for use on air. Viewers may also use KY Tonight’s web form at KET’s Kentucky Tonight Homepage to send messages.

The phone line for viewer calls during the program is

1-800-494-7605 and opens at about 8:15 pm (ET) Monday, Feb.15

Kentucky Tonight programs are archived online, made available via podcast, and rebroadcast on KET and KET KY. Archived programs, information about podcasts, and broadcast schedules are available at Kentucky Tonight Homepage.