Creating A Cycle Of Debt
Consumer Bureau research and supervisory actions confirmed the cycle of debt as core to the payday lenders’ business model. The majority of payday loans occur in long sequences of repeat loans, and most loans are taken out quickly after the other — more than 80 percent of all payday loans are followed by another loan within 14 days.
In its enforcement actions, the Consumer Bureau has confirmed that trapping consumers in a cycle of debt is often standard industry practice. In investigating Ace Cash Express, the Consumer Bureau uncovered a training manual that instructed employees to flip borrowers from one unaffordable loan to the next.
The Center for Responsible Lending estimates that payday lenders drain more than $4 billion a year from consumers in states where this type of lending is allowed.
Nearly 10,000 Complaints Submitted
In less than three years, consumers have submitted nearly 10,000 complaints about payday loans to the Consumer Bureau’s database. More than half the complaints were submitted about just 15 companies, while the rest of the complaints were spread across 626 companies. When contacted by the Consumer Bureau, the five companies with the most complaints responded by offering little to no relief, either monetary or non-monetary. Delbert Services and CashCall, who share the same owner, notably offered no relief.
Poor Communication & Unexpected Expenses
More than 35 percent of complaints submitted to the Consumer Bureau about payday lenders related to lenders’ communication tactics and unexpected fees or interest. Continued attempts to collect debt not owed and taking or threatening an illegal action were the next biggest issues, making up 12 percent of all complaints each. Other issues included possible ID theft; overdraft fees charged because collection attempts caused a negative balance; involuntary bank account closure when repeated debt collection efforts caused a borrower’s bank account to become severely overdrawn; and payday lending in states where it’s not authorized.
Working Toward A Solution
In June 2016, the Consumer Bureau proposed a rule that took a historic step by asking, for the first time, that payday, auto title, and other high-cost installment lenders determine whether customers could afford to repay loans with enough money left over to cover normal expenses without re-borrowing. During consideration of the rule, we issued a
joint statement
with 11 leading consumer, civil rights and faith organizations urging that the draft rule be strengthened and that certain loopholes be closed.
Final Rule
A final rule announced in October 2017 took important steps to protect consumers nationwide from short-term payday and auto title loans by establishing an ability-to-repay principle. The rule represents an important victory against lenders that use a debt-trap business model.
While the rule is a major step forward, high-cost payday lenders will be exempt from the new ability-to-repay requirement for up to six loans per year for every customer. Nevertheless, payday lenders continue to oppose this overdue protection for consumers.
In January 2018, the new acting director of the bureau announced he was delaying and re-opening the rule for further review. Meanwhile, opponents seek votes in Congress to simply repeal it. We will work with policymakers to ensure the delay doesn’t weaken this important effort and that attempts to repeal fail.
However, the rule makes clear that states can continue to enact stronger rules. For example, fifteen states plus the District of Columbia have already implemented strong state laws against the payday debt trap by enforcing an interest rate cap of 36 percent. States should continue to enact and enforce rate caps like these, as the Consumer Bureau does not have the legal authority to do so.
