By Q. Jarock. University of Rochester. 2018.
This includes situations in which a lender breaks down a payment into three attempts in 1 day (4 percent of payments observed) and four or more attempts in 1 day (2 percent of payments observed) short loan payday. The most extreme practice the Bureau has observed was a lender who attempted to collect payment from a single account 11 times in one day interest for payday loan. The Bureau also has received consumer complaints about lenders making multiple attempts to collect in one day, including an instance of a lender making nine payment attempts in a single day. When multiple payment requests are submitted to a single account on the same day by a payday lender, the payment attempts usually all succeed (76 percent) or all fail (21 percent), 769 leaving only 3 percent of cases where one but not all attempts succeed. After a second failed attempt, 66 percent of failed payments are re-presented, and 50 percent are re-presented after three failures. Consumers have complained to the Bureau that lenders attempt to make several debits on their accounts within a short period of time, including one consumer who had taken out multiple loans from several online payday lenders and reported that the consumer’s bank account 772 was subject to 59 payment attempts over a 2 month period. Lenders appear more likely to deviate from the payment schedule after there has been a failed payment attempt. According to Bureau analysis, 60 percent of payment attempts following a failed payment came within 1-7 days of the initial failed attempt, compared with 773 only 3 percent of payment attempts following a successful payment. The Bureau observed a lender that, after a returned payment, made a payment presentment every week for several weeks. Approximately 80 percent of these smaller attempts resulted in all three presentments being returned for non-sufficient funds. Cumulative Impacts These practices among payday and payday installment lenders have substantial cumulative impacts on consumers. Industry analyses, outreach, and Bureau research suggest that the industry is an extreme outlier with regard to the rate of returned items. As a result of payment practices in these industries, consumers suffer significant non-sufficient funds, overdraft, and lender fees that substantially increase financial distress and the cumulative costs of their loans. Outlier Return Rates Financial institution analysis and Bureau outreach indicate that the payday and payday installment industry is an extreme outlier with regard to the high rate of returned items generated. These returns are most often for non-sufficient funds, but also include transactions that consumers have stopped payment on or reported as unauthorized. The institution observed 775 High return rates for non-sufficient funds may also be indicative of lenders’ problematic authorization practices. Although such an Entry may be better characterized as “unauthorized,” as a practical matter it may be returned for insufficient funds before a determination regarding authorization can be made. Therefore, return rate monitoring should not be limited to only unauthorized transactions, but include returns for other reasons that may warrant further review, such as unusually high rates of return for insufficient funds or other administrative reasons. However, most of these returns were triggered by non-sufficient funds; lenders generally had an unauthorized return rate below 1 percent. Among individual industries, the industry with the next highest return rate was cable television at 2. In addition to this combined financial institution analysis, Bureau research and outreach suggest extremely high rates of returned payments for both storefront and online lenders. Moreover, of the 30 percent of second attempts and 27 percent of third attempts that “succeed,” in the customers’ accounts. However, among the “successful” payments, Bureau research indicates that approximately 6 percent are paid only by overdrafting the consumer’s account. The Bureau’s analysis includes payday lenders and payday installment lenders that only operate online; the dataset excludes lenders that provide any storefront loans. In comparison, the Chase dataset includes both storefront and online payday lenders. The fact that the consumer has not shown up in the store is a sign that the consumer may be having difficulty making the payment. In contrast, online lenders generally collect all payments electronically, and have more success on the initial payment attempt. Account Fees Bureau analysis, consumer complaints, and public litigation documents show that the 782 damage from these payment attempts can be substantial. Fifty percent of online borrowers in the Bureau’s analysis of online payday and payday installment loans incurred at least one overdraft or non-sufficient funds return in connection with their loans, with average fees for 783 these consumers at $185. Indeed, 10 percent of accounts experienced at least 10 payment withdrawal attempts that result in an overdraft or non-sufficient funds return over an 18 month 784 period. A small but significant percentage of consumers suffer extreme incidences of overdraft and non-sufficient funds fees on their accounts; for consumers with at least one online payday attempt that resulted in an overdraft or non-sufficient funds return, 10 percent were 785 charged at least $432 in related account fees over the 18 month sample period.
If a subset perform the required Affordability and effort performing an in-depth of repeat borrowers are generating the Assessment in the time available? Affordability Assessment payday loan company list, which has lion’s share of the loans (and paying an little predictive power 1 hour payday loan lenders direct. If 90% of loans are made ‘assessing’ affordability: ‘It is possible that: ‘Firms that invest time and effort in to repeat borrowers who do pay back, for a customer to have loans with more proper affordability assessments may lenders can afford to make 10% of loans than one of our U. The application for a new loan by a their product to consumers as one-off customer who currently has a loan short term loans (costing on average Still, why is a business which takes on outstanding with one of our businesses £25 per £100 borrowed for 30 days), but only new borrowers with a high in the U. It be loss leaders with repeat loans appears that lenders may be using the generating the profts. Similarly, borrower’s frst loan itself as a substitute because revenues are loan-specifc credit check. According to Dollar rather than borrower-specifc it can be Financial, ‘We can underwrite to the proftable for all the borrowers in a ninth decimal point a customer’s ability portfolio to default, as long as they pay 22. The credit quality of the pool payday payday executive commented that, ‘It’s not of applicants attracted to expensive, Information about your 65 65 income necessarily a proftability issue, it’s a easy to access, online payday loans is Pay slips or other proof of 52 6 responsibility issue. Running out of cash at the end of income past and we continue to believe that it the month is, in and of itself, a strong Copies of bank statements 68 3 is quite reasonable to take signifcantly indicator of fnancial distress and Details of your outgoings 23 19 higher losses by being less deteriorating credit quality. Base 365 372 number of different business models exist, all of which can be proftable but No one can deny that lending decisions Source Bristol Report (University of Bristol 2013: 45). Are losses simply a It appears that the higher losses responsible behaviours are also the function of the creditworthiness of the experienced by online lending most proftable. It is interesting that businesses are due to lesser the credit quality of online borrowers underwriting standards. This has If proftability and responsible lending appears to be higher than the credit important implications for the new cap are not necessarily aligned can quality of retail borrowers, yet online on the total cost of credit. Losses are competition in the online payday lending businesses face higher losses not externally determined, a necessary lending market ever deliver good than retail businesses. A competitive Report found that online payday providing credit to certain groups of market rewards successful companies borrowers had higher incomes, were borrowers. If proftability and more likely to be in employment, were large extent by the underwriting responsibility are not aligned in the more likely to have a full-time earner in decisions that lenders make. The high rate makes it harder for the In their excellent 2011 paper, ‘Price- borrower to repay in full, but, coupled Driven Adverse Selection in Consumer with low fnancial capability it makes the Lending Markets’, Phillips and Raffard borrower more likely either to roll over (2011) suggest that adverse selection is or return for another loan within a an increasing function of price. If payday the case adverse selection may be loans are frequently creating their own higher in online payday lending demand, this would explain the businesses simply because the rates market’s extraordinarily fast growth rate charged for online loans are higher than not only in this country but wherever those charged for retail loans. A cap on the conditions: total cost of credit places an upper bound on the amount of underwriting • At inception their need for a small risk a lender can take in a much clearer loan must be so great that it is and more straightforward way than a rational for them to agree to pay vague requirement to ‘assess 30% interest to borrow for just one affordability’. Given that the average payday borrower’s income is only around £1,231 net per month (Consumer Finance Association 2013a) and the average loan requires a repayment of £270 + £81 = £351, ie 28. This may also explain why online lending businesses face higher losses than retail lending businesses – the higher charges associated with online loans simply make them harder to repay. The most effcient way for why lenders have been seen to additional ‘extension fee’). Lending Compliance Review Final second loan is typically classifed as a Report, ‘staff in two large high-street separate and distinct loan in lenders’ How long does it take for lenders to frms told us that rollovers were fnancial statements. Taking three months-long regarded as key “proft drivers” and loans in three months is obviously much that staff were encouraged to promote What is refnancing? Refnancing occurs more detrimental to a borrower than them – in one case this was even written when the borrower repays the full would be taking three month-long loans into their training manual. This loan carries the same A signifcant tightening of regulation interest rate as the frst loan. In mitigate regulatory risk is to recoup both cases the borrower faces an • Competition from other lenders. However, lenders do not face ferce competition for all loans – just for new loans, ie loans initiated after the 25. In 2002 the Offce of the Comptroller of the borrower has been loan-free for a Currency found that Dollar Financial was meaningful period of time.
Both bank surveys reported low charge-off rates: in the community bank survey the average net charge-off rate for loans under $1 online payday cash advance loan,000 was 1 percent and for larger loans was less than 1 percent ( payday loan consolidation loans. In the all bank survey, 34 percent reported no charge-offs and 61 percent reported charge-offs of 3 percent or less. There is little data available on the demographic characteristics of borrowers who take liquidity loans from banks. The Bureau’s market monitoring indicates that a number of banks offering these loans are located in small towns and rural areas. Further, market outreach with bank trade associations indicates that it is not uncommon for borrowers to be in non-traditional employment and have seasonal or variable income. However, as described below, they are authorized to make some small-dollar loans at rates up to 28 percent interest plus an applicable fee. Through market monitoring and outreach, the Bureau is aware that a significant number of credit unions, both Federal and State chartered, offer liquidity loans to their members, at least on an accommodation basis. The credit unions generally engage in some sort of underwriting for these loans, including verifying borrower income and its sufficiency to cover loan payments, reviewing past borrowing history with the institution, and verifying major financial obligations. On a hypothetical $500, 6-month loan, many credit unions would charge a 36 percent or less total cost of credit. Some Federal credit unions offer small-dollar loans aimed at consumers with payday loan debt to pay off these loans at interest rates of 18 percent or less with application fees of $50 or 310 less. The total cost of credit, when application fees are included, may range from approximately 36 to 70 percent on a small loan of about $500, depending on the loan term. Application fees charged to all applicants for credit are not part of the finance charge that must be disclosed under Regulation Z. Initiating Payment from Consumers’ Accounts As discussed above, payday and payday installment lenders nearly universally obtain at origination one or more authorizations to initiate withdrawal of payment from the consumer’s account. There are a variety of payment options or channels that they use to accomplish this goal, and lenders frequently obtain authorizations for multiple types. Different payment channels are subject to different laws and, in some cases, private network rules, leaving lenders with broad control over the parameters of how a particular payment will be pulled from a consumer’s account, including the date, amount, and payment method. Obtaining Payment Authorization A variety of payment methods enable lenders to use a previously-obtained authorization to initiate a withdrawal from a consumer’s account without further action from the consumer. Given that the check is created by the lender, it does not bear the consumer’s signature. Payday and payday installment lenders—both online and in storefronts—typically obtain a post-dated check or electronic payment 321 authorization from consumers for repayments of loans. For an online loan, a consumer often provides bank account information to receive the loan funds, and the lender often uses that bank account information to obtain 323 payment from the consumer. In addition, as part of our information collection process, we may detect additional bank accounts under the ownership of the consumer. Some traditional installment lenders also obtain an electronic payment authorization from their customers. Payday and payday installment lenders often take authorization for multiple payment 325 methods, such as taking a post-dated check along with the consumer’s debit card information. For storefront payday loans, providing a post-dated check is typically a requirement to obtain a loan. You must contact us at least three (3) business days prior to when you wish the authorization to terminate. If you revoke your authorization, you authorize us to make your payments by remotely- created checks as set forth below. For example, although some payday and payday installment lenders provide consumers with alternative methods to repay loans, these options may be burdensome and may significantly change the terms of the loan. Other lenders change the origination process if consumers do not immediately provide account access. For example, some online payday lenders require prospective customers to contact them by phone if they do not want to provide a payment authorization and wish to pay by money order or check at a later time. Other lenders delay the disbursement of the loan proceeds if the consumer does not 329 immediately provide a payment authorization. Banks and credit unions have additional payment channel options when they lend to consumers who have a deposit account at the same institution. As a condition of certain types of loans, many financial institutions require consumers to have a deposit account at that same 330 institution.
The Bureau therefore solicits comment on whether a loan with an all-in cost of credit above 36 percent should be deemed a covered loan if fast cash advance payday loan, at any time instant cash payday loan, the lender obtains vehicle security. However, given the limited circumstances in which a consumer would grant vehicle security after consummation, the Bureau also seeks comment on whether, for a loan with an all-in cost of credit above 36 percent, lenders should be prohibited from taking a security interest in a vehicle after consummation. A lender would obtain a leveraged payment mechanism if the lender has the right to initiate a transfer of money from the consumer’s account to repay the loan, if the lender has the contractual right to obtain payment from the consumer’s employer or other payor of expected income, or if the lender requires the consumer to repay the loan through payroll deduction or deduction from another source of income. In all three cases, the consumer is required, under the terms of an agreement with the lender, to cede autonomy over the consumer’s account or income stream in a way that the Bureau believes changes that lender’s incentives to determine the consumer’s ability to repay the loan and can exacerbate the harms the consumer experiences if 183 the consumer does not have the ability to repay the loan and still meet the consumer’s major financial obligations and basic living expenses. For example, this would occur with a post-dated check or preauthorization for recurring electronic fund transfers. However, the proposed regulation would not define leveraged payment mechanism to include situations in which the lender or service provider initiates a one-time electronic fund transfer immediately after the consumer authorizes such transfer. As proposed comment 3(c)(1)-1 explains, the key principle that makes a payment mechanism “leveraged” is whether the lender has the ability to “pull” funds from a consumer’s account without any intervening action or further assent by the consumer. In those cases, the lender’s ability to pull payments from the consumer’s account gives the lender the ability to time and initiate payments to coincide with expected income flows into the consumer’s account. This means that the lender may be able to continue to obtain payment (as long as the consumer receives income and maintains the account) even if the consumer does not have the ability to repay the loan while meeting his or her major financial obligations and basic living expenses. In contrast, a payment mechanism in which the consumer “pushes” funds from his or her account to the lender does not provide the lender leverage over the account in a way that changes the 184 lender’s incentives to determine the consumer’s ability to repay the loan or exacerbates the harms the consumer experiences if the consumer does not have the ability to repay the loan. Proposed comment 3(c)(1)-2 provides examples of the types of authorizations for lender- initiated transfers that constitute leveraged payment mechanisms. These include checks written by the consumer, authorizations for electronic fund transfers (other than immediate one-time transfers as discussed further below), authorizations to create or present remotely created checks, and authorizations for certain transfers by account-holding institutions (including a right of set- off). Proposed comment 3(c)(1)-3 explains that a lender does not obtain a leveraged payment mechanism if a consumer authorizes a third party to transfer money from the consumer’s account to a lender as long as the transfer is not made pursuant to an incentive or instruction from, or duty to, a lender or service provider. The Bureau solicits comment on whether this definition of leveraged payment mechanism appropriately captures payment methods that are likely to produce the risks to consumers identified by the Bureau in the section-by-section analysis of proposed § 1041. Proposed comment 3(c)(1)-3 further clarifies that the phrase “immediately” means that the lender initiates the transfer after the authorization with as little delay as possible, which in most circumstances will be within a few minutes. The Bureau anticipates that scenarios involving authorizations for immediate one-time transfers will only arise in certain discrete situations. For closed-end loans, a lender is permitted to obtain a leveraged payment mechanism more than 72 hours after the consumer has received the entirety of the loan proceeds without the loan becoming a covered loan. Thus, in the closed- end context, this exception would only be relevant if the consumer was required to make a payment within 72 hours of receiving the loan proceeds—a situation which is unlikely to occur. Longer-term open-end can be covered loans if the lender obtains a leveraged payment mechanism within 72 hours of the consumer receiving the full amount of the funds which the consumer is entitled to receive under the loan. Thus, if a consumer only partially drew down the credit plan, but the consumer was required to make a payment, a one-time electronic fund transfer could trigger coverage without the one-time immediate transfer exception. The Bureau believes it is appropriate for these transfers not to trigger coverage because there is a reduced risk that such transfers will re-align lender incentives in a similar manner as other types of leveraged payment mechanisms. The Bureau solicits comment on whether this exclusion from the definition of leveraged payment mechanism is appropriate and whether additional guidance is needed. To activate the assignment, the creditor simply submits it to the debtor’s employer, who then pays all or a percentage of debtor’s 419 wages to the creditor. For example, they can be used either as a method of making regular payments during the term of the loan or as a collections tool when borrowers default. As discussed further in Market Concerns—Short-Term Loans, the Bureau is concerned that where loan agreements provide for assignments of income, the lender incentives and potential consumer risks can be very similar to those presented by other forms of leveraged payment mechanism defined in proposed § 1041. In particular, a lender—as when it has the right to initiate transfers from a consumer’s account—can continue to obtain payment as long as the consumer receives income, even if the consumer does not have the ability to repay the loan while meeting her major financial obligations and basic living expenses. Thus, the Bureau believes that loan agreements that provide for assignments of income may present the same risk of harm to consumers as other types of leveraged payment mechanisms. The Bureau seeks comment on the proposed definition and whether additional guidance is needed. The Bureau recognizes that some consumers may find it a convenient or useful form of financial management to repay a loan through a revocable wage assignment. Rather, the proposed rule would impose a duty on lenders to determine the consumer’s ability to repay when the lender or service provider has the right to obtain payment directly from the consumer’s employer or other payor of income. As proposed comment 3(c)(3)-1 explains, a payroll deduction involves a direction by the consumer to the consumer’s employer (or other payor of income) to pay a portion of the consumer’s wages or other income to the lender or service provider, rather than a direction by the lender to the consumer’s employer as in a wage assignment. The Bureau is concerned that if an agreement between the lender and consumer requires the consumer to have his or her employer or other payor of income pay the lender directly, the consumer would be in the same situation and face the same risk of harm as if the lender had the ability to initiate a transfer from the consumer’s account or had a right to a wage assignment.