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Report: Consumer Protection
Predatory Lending In Lane County
Payday loans are short term, high interest rate loans marketed to cash-strapped consumers. Consumers of such loans borrow against their next paycheck, typically for a term of 14 days, at a set fee. If the consumer is unable to repay the entire loan on the due date, the payday lender encourages the consumer to pay more fees to “rollover” the loan to extend it for another short term, leading many consumers into a cycle of debt.
Over the past decade, payday lending has grown from almost nothing to over 25,000 storefronts in most states across the country, including Oregon. This has happened at a time when the majority of mainstream lenders have left the traditional small loan market, and as many consumers have exhausted their credit cards or other types of credit. The growth of the payday lending industry is partly explained by the appeal of quick access to cash with few questions asked.
As of December 31, 2005 there were 359 storefronts licensed to sell payday loans in Oregon, with Lane County home to 31 of those storefronts.1 While many payday storefronts are only in that business, our survey found that rent-toown stores and auto title loan outfits are diversifying into payday loans as well.
At the same time, Oregon has enacted only minimal consumer protections regarding payday loans. Currently, for example, there is no cap on the interest a lender may charge, or the amount of such loans.
This is a report of the findings of OSPIRG’s study of payday lending in Lane County, in which staff and volunteers conducted in-person surveys of licensed payday lending storefronts, a review of actual borrowers’ loan contracts and promissory notes in Oregon, as well as additional background research that included an examination of the industry’s national and local presence, growth, and regulation.
Key findings include:
High-Cost Loans Rip Off Cash- Strapped Borrowers
521% Annual Interest Rates
In Springfield, Eugene and Lane County as a whole, the most common annual percentage rate (APR) charged by surveyed payday lenders for a $300 loan for a 14-day term is 521%. Further, the APR is not always posted clearly. In Lane County, surveyors could not locate the required posting of the annual interest rate in 21% of payday loan storefronts.
Obstacles Make Payday Loans Difficult to Repay
Our survey indicates that borrowers are typically required to pay back the loan in a single payment, not installments, and to do so after an extremely short loan term of days or weeks in order to prevent the check used to secure the loan from bouncing. According to a 2004 study by the Oregon Department of Consumer and Business Services, 74% of borrowers report being unable to repay their payday loan when due and must either default or “roll over” the loan.
Despite this loan structure’s challenges to cash-strapped borrowers, our survey indicates lenders do not generally conduct the rigorous test of a borrower’s ability to repay the loan with a credit check.
Loans Quickly Drive Borrowers into a Debt Trap
High Cost Rollovers
To rollover the loan, payday lenders generally charge a fee equal to the amount of the fee the consumer paid to take out the loan in the first place. These high fees quickly mount over the course of each short term, and do not pay down the principle. For example, if a consumer takes out a typical $300 loan with a $60 fee and rolls it over three times, he or she will owe a total of $240 in fees plus the $300 principal.
If a consumer cannot repay the loan when due, and the lender cashes the borrower’s check, the borrower is likely to incur non-sufficient fund (NSF) fees, among other penalties. To make matters worse, payday lenders may insert clauses in loan contracts that further trap borrowers in debt. An acceleration clause uncovered in our research, for example, allows the lender to declare the entire unpaid balance to be due immediately, and present a borrower’s check at his bank for payment in advance of the due date, triggering the NSF fees.
A borrower who defaults on a payday loan is also likely to find himself driven deeper into debt. Our research reveals that lenders may insert clauses into the loan application or contract that put the borrower at a disadvantage should he or she default on the loan, such as requiring the borrower to pay the lender’s costs and expenses of collection, including attorney’s fees and court costs. Shortterm lenders have sued over 12,000 Oregonians.
To address the payday loan problems outlined in this report, OSPIRG recommends policymakers and regulators take steps to protect consumers. Policy recommendations include capping interest rates and fees, requiring the loans be structured to encourage or require installment payments and to have longer loan terms, limiting the number of rollovers, and prohibiting the use of postdated checks or electronic access to the borrower’s bank account.
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