By L. Vatras. University of Colorado at Boulder.
As an alternative to the proposed ability-to-repay requirement payday loan company names, the Bureau has considered proposing a disclosure remedy consisting of requiring lenders to provide disclosures to borrowers warning them of the costs and risks of default and other harms that are associated with taking out covered longer-term loans direct lender payday loan. However, the Bureau believes that such a disclosure remedy would be significantly less effective in preventing the harms described above, for three reasons. First, disclosures do not address the underlying incentives observed in the markets for covered longer-term loans, i. Second, empirical analysis of the impacts of disclosures for payday borrowers, including the Bureau’s own analysis of the Texas disclosure requirement impacts, showed that disclosures have only modest impact overall on borrowing patterns. The Bureau believes these findings provide insights into the challenges of informing borrowers in difficult financial circumstances about risks of borrowing, and therefore are relevant to the markets for covered longer-term loans. Due to the potential for tunneling in their decision-making and general optimism bias, as discussed in more detail in Market Concerns—Longer-Term Loans, consumers are likely to dismiss warnings of possible negative outcomes as not applying to them, and to not focus on disclosures of the possible harms associated with an outcome, default, that they do not anticipate experiencing themselves. To the extent the borrowers have thought about the likelihood that they themselves will default on a loan, a general warning about how often people default is unlikely to cause them to revise their own expectations about the chances they themselves will default. The Bureau requests comment on all aspects of the appropriateness of the proposed approach. For example, the Bureau requests comment on whether a simple prohibition on making covered longer-term loans without determining ability to repay, without specifying the elements of a minimum baseline methodology, would provide adequate protection to consumers and clarity to industry about what would constitute compliance. Similarly, the Bureau requests comment on the adequacy of a less prescriptive requirement for lenders to “consider” specified 516 factors, such as payment amount under a covered longer-term loan, income, debt service payments, and borrowing history, rather than a requirement to determine that residual income is sufficient. Also during outreach, some stakeholders suggested that the Bureau should adopt underwriting rules of thumb—for example, a maximum payment-to-income ratio—to either presumptively or conclusively demonstrate compliance with the rule. The Bureau solicits comment on whether the Bureau should define such rules of thumb and, if so, what metrics should be included in a final rule and what significance should be given to such metrics. The substantive requirements for making the calculations for each category of income and expenses, as well as the overall determination of a consumer’s ability to repay, are provided in 517 § 1041. It would define basic living expenses as expenditures, other than payments for major financial obligations, that a consumer makes for goods and services necessary to maintain the consumer’s health, welfare, and ability to produce income, and the health and welfare of members of the consumer’s household who are financially dependent on the consumer. Accordingly, the proposed definition of basic living expenses is a principle-based definition and does not provide a comprehensive list of the expenses for which a lender must account. Proposed comment 9(a)(1)-1 provides illustrative examples of expenses that would be covered by the definition. It provides that food and utilities are examples of goods and services that are necessary for maintaining health and welfare, and that transportation to and from a place of employment and daycare for dependent children, if applicable, are examples of goods and services that are necessary for maintaining the ability to produce income. The Bureau recognizes that provision of a principle-based definition leaves some ambiguity about, for example, what types and amounts of goods and services are “necessary” for the stated purposes. Lenders would have flexibility in how they determine dollar amounts that 518 meet the proposed definition, provided that they do not rely on amounts that are so low that they are not reasonable for consumers to pay for the types and level of expenses in the definition. The Bureau’s proposed methodology also would not mandate verification or detailed analysis of every individual consumer expenditure. In contrast to major financial obligations (see below), a consumer’s recent expenditures may not necessarily reflect the amounts a consumer needs for basic living expenses during the term of a prospective loan, and the Bureau is concerned that such a requirement could substantially increase costs for lenders and consumers while adding little protection for consumers. The Bureau solicits comment on its principle-based approach to defining basic living expenses, including whether limitation of the definition to “necessary” expenses is appropriate, and whether an alternative, more prescriptive approach would be preferable. For example, the Bureau solicits comment on whether the definition should include, rather than expenses of the types and in amounts that are “necessary” for the purposes specified in the proposed definition, expenses of the types that are likely to recur through the term of the loan and in amounts below which a consumer cannot realistically reduce them. The Bureau also solicits comment on whether there are standards used in other contexts that could be relied upon by the Bureau. For example, the Bureau is aware that the Internal Revenue Service and bankruptcy courts have their own respective standards for calculating amounts an individual needs for expenses while making payments toward a delinquent tax liability or under a bankruptcy-related repayment plan. Payments for major financial obligations would be subject to the consumer statement and verification evidence provisions under proposed § 1041. Comment 9(a)(2)-1 would further clarify that housing expense includes the total periodic amount that the consumer applying for the loan is responsible for paying, such as the amount the consumer owes to a landlord for rent or to a creditor for a mortgage. It would provide that minimum payments under debt obligations include periodic payments for automobile loan payments, student loan payments, other covered loan payments, and minimum required credit card payments. Expenses that the Bureau has included in the proposed definition are expenses that are typically recurring, that can be significant in the amount of a consumer’s income that they consume, and that a consumer has little or no ability to change, reduce, or eliminate in the short run, relative to their levels up until application for a covered longer-term loan. The Bureau believes that the extent to which a particular consumer’s net income is already committed to making such payments is highly relevant to determining whether that consumer has the ability to make payments under a prospective covered longer-term loan.
The Centre for Responsible Lending found by 2005 that number had grown to 224 over $278 million a direct lender payday loan, generating over $56 direct online loan payday lenders. Oregon‟s payday lending industry was therefore medium sized by American standards, roughly 225 commensurate with the state‟s population of approximately 3. The Centre for Responsible Lending estimated in December 2007 that the 227 amendments will save Oregon borrowers up to $65 million in loan fees. In signing the amendment into law, Oregon Governor Ted Kulongoski was quoted in an official press release: “The sad reality is that many borrowers cannot repay the loan in two weeks. And because of the exorbitant interest rate, they quickly find themselves mired in debt. Because they live and work at the low end of the pay scale, these borrowers must often choose between buying 228 food and paying the loan fees. However, unlike in Oregon (and the other examples above), the New Mexico lawmakers chose not to limit the interest rate allowable for loans. Instead, New Mexico chose a fee based cap - which means that the interest charged can still be very high, depending on the repayment term of the loan. Under this system, the minimum interest charge applicable to a New Mexico payday loan (using a 35 day repayment period) is equivalent to 166. Under the legislation, a borrower who is unable to repay their loan must be 231 offered a 130 day repayment plan with no additional fees or interest. The law also aims to prevent loan rollovers, or „loan flipping‟, by requiring the borrower to wait ten days after having paid off one payday loan before they 232 can obtain a further loan. This regulation is supported by a state-wide payday loan database which is maintained by the New Mexico Regulation and Licensing Department. Finally, the law prohibits a lender from loaning an amount in excess of 25 234 percent of the individual‟s gross monthly income. Consumer advocates have criticised the New Mexico legislation for not appropriately addressing the fundamental issues of payday loans - namely the cost of the credit and the practice of requiring repayment in a single 235 payment. This is not necessarily the case in Australia, although it is reasonably rare for a loan to be paid off over more than two pay periods. Of course, even if a loan is paid off in two payments over the course of a month, the interest on the loan does not change - it is determined by the repayment amount and the over-all term of the loan. Further, there are claims payday lenders in New Mexico have evaded 237 regulations by changing their products to high-cost instalment loans which 238 are not caught by the legislation. The New Mexico Senate passed the bill on 16 March 2007 in a 37-5 vote which was described at the time as a compromise deal. This view is bolstered by the Centre for Responsible Lending, which has found cooling off periods, payment plans, loans data-bases and income level related borrowing limits have been largely ineffective in preventing repeat 241 borrowing. Conversely, the same report found the relatively simple measure of a comprehensive 36% interest rate cap has been highly effective whenever and wherever enacted (such as in Oregon, North Carolina and through the Military Lending Act). By revamping the product as installment loans, lenders can often extend the loan period beyond the loan period defined for a short-term loan. This has been seen in Australia, when lenders in New South Wales extended loans terms to 63 days, in order to avoid legislation covering short term loans - defined as having loan terms of 62 days or less. Certainly, Advance America withdrew their minor presence in New Mexico by closing nine stores. The company stated in a 23 September 2008 media release: “This decision to close these Centers is the result of recent regulatory and legislative actions that prevent the Company from continuing to 242 operate in an economically viable manner... Prior to the reform, in 2005 the Centre for Responsible Lending reported New Mexico had a small to mid-sized payday lending industry by American standards. For the purposes of comparison, that is around 160,000 less 245 than Western Australia. Until new data is reported it is not possible to determine whether the 2007 payday lending reforms have had a significant effect. As in other jurisdictions applying comprehensive interest rate caps, the laws effectively prohibit the sale of payday loans in the District. Under the legislation, payday lenders may continue to operate, but only if they obtain a Money Lenders licence from the D. Hampton stated: “This is a consumer protection measure intended to prevent the perpetual cycle of debt from entrapping some of our most vulnerable residents. Cheh was quoted by The Washington Post: “Less than 1 percent of borrowers are able to pay it back or pay it back in two weeks. In June 2008 Ohio passed payday lending regulation which was affirmed by the public in a state-wide referendum later that year.
Consumers Have Difficulty Stopping Lenders’ Ability to Access Their Accounts 786 Id account loan payday savings. One way consumers could attempt to stop multiple attempts to collect from their accounts would be to direct their lender to stop initiating payments payday best loan. To do so, however, the consumer must be able to identify and contact the lender—which can be difficult or impossible for consumers who have borrowed from an online lender. For example, several lenders require consumers to provide another form of account access in order to effectively revoke authorization with respect to a specific payment method—some lenders require consumers to provide this back-up payment method as part of the origination 790 agreement. Some lenders require consumers to mail a written revocation several days before 791 the effective date of revocation. 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. Consumer complaints sent to the Bureau also indicate that consumers struggle with anticipating and stopping payment attempts by payday lenders. Complaints where the consumer has identified the issues “can’t stop lender from charging my bank account” or “lender charged my bank account on wrong day or for wrong amount” account for roughly 9 percent of the more 796 than 12,200 payday loan complaints the Bureau has handled since November 2013. Although the Bureau does not specifically collect information from consumers on the frequency of these issues in the nearly 24,000 debt-collection complaints related to payday loans or in the more than 9,700 installment loan complaints the Bureau has also handled, review of those complaints and complaints submitted by consumers about deposit accounts suggest that many consumers who No. The Bureau alleged that Hydra Group falsified loan documents to claim that the consumers had agreed to the phony online payday loans. In addition, as part of our information collection process, we may detect additional bank accounts under the ownership of the consumer. The other option for consumers is to direct their bank to stop payment, but this too can be challenging. Depository institutions typically charge a fee of approximately $32 for processing a 797 stop payment order, making this a costly option for consumers. In addition, some lenders 798 charge returned-item fees if the stop payment order successfully blocks an attempt. To execute a stop payment order on a check, banks usually use the check number provided by the consumer. Lenders may use a parent company name, abbreviated name, or vary names based on factors like branch location. Bank systems with limited 797 Median stop payment fee for an individual stop payment order charged by the 50 largest financial institutions in 2015. Although information has been obtained from the various financial institutions, the accuracy cannot be guaranteed. Some financial institutions impose additional procedural hurdles, for instance by requiring consumers to provide an exact payment amount for a stop payment order and allowing 800 payments that vary by a small amount to go through. Others require consumers to provide the 799 See Letter to Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, from the National Consumer Law Center, Consumer Federation of America, Center for Responsible Lending, Consumer Action, Consumers Union, National Association of Consumer Advocates, National Consumers League and U. Even if a consumer located a lender’s identification code on a previous debit, lenders may vary this code when they 802 are debiting the same consumer account. The Bureau believes that there is also some risk that bank staff may misinform consumers about their rights. In addition, some merchants (including lenders) are gaming the system by changing merchant identifiers to work around stop payments. However, the narrow scope of these rules, limited private network monitoring and enforcement capabilities over them, and applicability to only one payment method mean that they are unlikely to entirely solve problematic practices in the payday and payday installment industries. Reinitiation Cap 804 The Bureau has received complaints from consumers alleging that banks told consumers that the bank could not do anything about unauthorized transactions from payday lenders and that the bank would not stop future debits. Even if the rule were not subject to ready evasion by originating entities, the cap also does not apply to future payments in an installment payment schedule. And then the following payment due during the next month can proceed despite any prior failures.
Because obtaining a credit report will add some cost payday loan amounts, the Bureau expects that lenders will order such reports only after determining that the consumer otherwise satisfies the ability-to-repay test so as to avoid incurring these costs for applicants who would be declined without regard to the contents of the credit report bad credit loan no payday. For the reasons previously discussed, the Bureau believes that verification evidence is critical to ensuring that consumers in fact have the ability to repay a loan, and that therefore the costs are justified to achieve the objectives of the proposal. The Bureau invites comment on whether to require lenders to obtain credit reports from a national credit reporting agency and from a registered information system. In particular, and in accordance with the recommendation of the Small Business Review Panel, the Bureau invites 567 comment on ways of reducing the operational burden for small businesses of verifying consumers’ payments under major financial obligations. The Bureau anticipates that some required payments under court- or government agency-ordered child support obligations will not appear in a national consumer report. To the extent the national consumer report omits information for a required payment, the lender could simply base its projections on the amount and timing stated by the consumer, if any. A lender would be required to obtain a national consumer report as verification evidence of a consumer’s payments under debt obligations generally, pursuant to § 1041. A lender’s compliance with that requirement would satisfy the requirement in proposed § 1041. It clarifies that for purposes of this method, reliable transaction records include a facially genuine original, photocopy or image of a receipt, cancelled check, or money order, or an electronic or paper record of depository account transactions or prepaid account transactions (including transactions on a general purpose reloadable prepaid card account, a payroll card account, or a government benefits card account), from which the lender can reasonably determine that a payment was for housing expense as well as the date and amount paid by the consumer. This method mirrors options a lender would have for obtaining verification evidence for net income. Accordingly, data derived from a record of depository account transactions or of prepaid account transactions, such as data from account data aggregator services that obtain and categorize consumer deposit account and other account transaction data, would also generally 569 satisfy the requirement. Bureau staff have met with service providers that state that they currently provide services to lenders and are typically able to identify, for example, how much a particular consumer expends on housing expense as well as other categories of expenses. It provides that, alternatively, a lender may estimate individual or household housing expense based on housing expense and other data (e. It further explains that a lender may estimate a consumer’s share of household expense based on estimated household housing expense by reasonably apportioning the estimated household housing expense by the number of persons sharing housing expense as stated by the consumer, or by another reasonable method. Several lender representatives expressed similar concerns during the Bureau’s outreach to industry. The Small Business 570 Review Panel Outline referred to lender verification of a consumer’s rent or mortgage payment using, for example, receipts, cancelled checks, a copy of a lease, and bank account records. Few consumers receive receipts or cancelled checks for rent or mortgage payments, they stated, and bank account statements may simply state the check number used to make a payment, providing no way of confirming the purpose or nature of the payment. Consumers with a lease would not typically have a copy of the lease with them when applying for a covered loan, they stated, and subsequently locating and transmitting or delivering a copy of the lease to a lender would be unduly burdensome, if not impracticable, for both consumers and lenders. The Bureau believes that many consumers would have paper or electronic records that they could provide to a lender to establish their housing expense. In addition, as discussed above, information presented to the Bureau during outreach suggests that data aggregator services may be able to electronically and securely obtain and categorize, with a consumer’s consent, the consumer’s deposit account or other account transaction data to reliably identify housing expenses payments and other categories of expenses. Nonetheless, the Bureau intends its proposal to be responsive to these concerns by providing lenders with multiple options for obtaining verification evidence for a consumer’s housing expense, including by using estimates based on the housing expenses of similarly situated consumers with households in the locality of the consumer seeking a covered loans. The Bureau’s proposal also is intended to facilitate automation of the methods of obtaining the verification evidence, making projections of a consumer’s housing expense, and calculating the amounts for an ability-to-repay determination, such as residual income. Similarly, a consumer may make payments in cash to another person, who then makes the payment to a landlord or mortgage servicer covering the housing expenses of several residents. During outreach with industry, one lender stated that many of its consumers would find requests for documentation of housing expense to be especially intrusive or offensive, especially consumers with informal arrangements to pay rent for a room in someone else’s home. To address these concerns, the Bureau is proposing the option of estimating a consumer’s housing expense based on the individual or apportioned household housing expenses of similarly situated consumers with households in the locality. The Bureau notes that if the method the lender uses to obtain verification evidence of housing expense for a consumer—including the estimated method—indicates a higher housing expense amount than the amount in the consumer’s statement under proposed § 1041. Accordingly, a lender may prefer use one of the other two methods for obtaining verification evidence, especially if doing so would result in verification evidence indicating a housing expense equal to that in the consumer’s written statement of housing expense. For example, some consumers may live for a period of time rent-free with a friend or relative. However, the Bureau does not believe it is possible to accommodate such situations without permitting lenders to rely solely on the consumer’s statement of housing expenses, and for the reasons previously discussed the Bureau believes that doing so would jeopardize the objectives of the proposal.
Borrowers Mixed on These feelings also correspond to Whether Loans Help respondents’ attitudes about their own More Than Hurt fnancial situations payday loan direct lender same day, with those who have Borrowers are torn about whether payday more frequent trouble meeting expenses loans mostly help or mostly hurt them get a loan on payday, more likely to say the loans hurt. They used more negative terms than positive ones, but some focused on the loan being helpful when they were in a tight spot. Interestingly, most borrowers did not disagree with others who offered opposing terms. This exercise revealed borrowers’ conflicted feelings, including appreciation for credit in a tough time while also feeling trapped by the difficulty of repaying the loan. Among the descriptions respondents used are: • Convenient • Sweet and Sour: Sweet when they • Rip off give it to you, sour when you’ve got • Evil to pay it back • Never-ending • Simple • Money hungry • Desperate • Lifesaver • Helpful but very dangerous • Should be abolished • Tempting • Takes advantage • Expensive • Emergency rescue • Panic • Friendly • Mistake • Helpful • Scary • Good in an emergency, but dangerous • Too easy • Predatory • Accessible www. You have to pay and you don’t want to because you’re it back right away, and then if you can going to lose the money, and you try to pay it back right away, why would you go think of other options first, and if you and get it to begin with? And I And I carried it for a couple of months had some medical bills that needed to be … and then paid it off with the income paid, and so I asked her about it. I wasn’t paying them back in full • Words to describe payday loans: at the particular time, and I kept trying “Expensive, yeah. Which caused • “You can show them the paycheck, but me to default, and I was behind in a lot they don’t know what are you spending of other areas, and I wasn’t able to take on your expenses outside of that money. I don’t want to, but I don’t know, so I can’t say I won’t do it again because I might need to. Borrowers Want Changes (3) Even if neither (1) nor (2) occurs, to Payday Loans they will continue to use payday Overall, borrowers are divided into three loans if they are in an especially fairly even groups as to whether there diffcult situation and the loans should be major changes, small changes, are available. Pew is conducting further research on the nature of changes that borrowers want to see. Regulation n Those who describe their fnancial Borrowers hold divergent views on situation as good, and those who many aspects of payday lending and describe it as bad. More storefront than Despite this desire for more regulation and online borrowers said they were likely to changes to how payday loans work, 3 in take out another payday loan. The tension 5 borrowers say they are likely to use the between borrowers wanting changes and loans again if they are in a fnancial bind. I think that they should redo, you know, their “When you need it, you’ve got to interest rates and their rules and all get it. Previous research conducted in North Payday Stores Are Gone Carolina, where a state law eliminated Pew’s research has shown that potential payday loan stores, similarly found that borrowers tend not to use payday loans people had not sought out payday loans when storefronts are not available in elsewhere when the stores closed, and their communities. In states without those who had previously borrowed from payday stores, just 5 percent of would- payday storefronts “were glad they no be borrowers sought loans online or 68 longer had the temptation. Borrowers tend to focus on vital for any effort to improve the utility the loan’s advertised price, a fee they can and transparency of payday loans as well afford, and not the impact that a lump- as other small-dollar credit products. The more than $400 required to instead of cutting back on expenses repay an average loan is so incompatible or using informal options, is that they with the $50 that the average payday perceive the loans as affordable because customer can afford that the customer lenders sell them as a short-term fx. The ends up re-borrowing repeatedly, paying information provided describes just two a fee every two weeks to take the same weeks of indebtedness, although most money back out to cover basic expenses. Borrowers have conficting Proponents of payday lending tend to talk desires—they want to receive a cash about overdrafts as the primary alternative infusion but do not want to create to a payday loan; borrowers instead mostly ongoing debt—and a payday loan’s describe their alternatives as taking on short repayment term makes it seem as long-term debt, cutting back on expenses, if both these desires can be met. But loan’s unaffordable lump-sum repayment even within this narrow range of options, structure effectively means that borrowers it is nearly impossible to comparison shop, pay only interest, so the principal is not because a payday loan’s ultimate cost reduced; this structure makes predicting and duration are vastly different from the the ultimate duration and cost of the loan stated loan terms. This choose a payday loan, most overdraft their ongoing series by The Pew Charitable bank accounts anyway. Further, 27 percent Trusts, Payday Lending in America, of payday borrowers say a withdrawal by presents in-depth fndings to help identify a payday lender has caused an overdraft, the features of a safe and transparent while others borrow from family or marketplace for consumer fnancial friends to pay off the loans, or use them services, to inform efforts to protect long term. These fndings indicate that consumers from harmful practices, and many of the potential benefts—avoiding to promote safe and transparent small- other debt, fees, or cutting back—do not dollar credit. Payday loans end up leaving borrowers in the same fnancial bind in which they started, despite having spent $520 annually on average. This inconsistency is refected in the sentiments of payday borrowers, who describe themselves as “satisfed” but are also deeply conficted. They express relief upon receiving credit during a tough time, appreciation for friendly and respectful service, and say they might use payday loans again if they are in a diffcult-enough situation.