The U.S. Consumer Financial Protection Bureau is considering action to limit the impact of payday and other short-term loans that can become “debt traps” for borrowers, said Director Richard Cordray.
“Financial products that can trigger a cycle of debt may generate substantial unexpected costs through repeated use, which can disrupt the precarious balance of consumers’ financial lives,” Cordray told the National Association of Attorneys General in a speech in Washington yesterday. “Often these products are marketed as short-term solutions to an emergency need, obscuring the risks inherent in the terms of the loan.”
Tougher rules on short-term credit could crimp revenue at banks such as Wells Fargo & Co. (WFC) and Regions Financial Corp. (RF) that offer such loans. CFPB action could also affect non-bank firms that engage in payday lending, such as Cash America International Inc. (CSH), EZCORP Inc. (EZPW) and DFC Global Corp. (DLLR)
The remarks by Cordray may mark the beginning of additional efforts by the agency to address potential abuses in the area of short-term lending, especially so-called payday loans.
The agency plans to extend its consumer complaint system to include short-term credit in the third quarter of this year, according to two people briefed on the bureau’s plans. Before that, it plans to issue a report on the repeated use of payday loans and short-term bank credit often referred to as deposit advance products, the people said.
“We have been analyzing these situations and will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit,” Cordray said. “There is a clear demand for short-term credit products, which can be helpful at times for consumers who use them responsibly.”
In his remarks, Cordray stressed the CFPB’s determination to address the problem of “debt traps.”
Consumer groups use the phrase to describe the downside of payday loans, a type of loan in which borrowers provide as collateral a postdated check for the amount of the loan plus a fee. Many of the transactions are now made online, with borrowers authorizing lenders to debit their account electronically when the payments fall due.
Consumer advocates argue that consumers may start as occasional users but get hooked as they need a new loan to cover old debts. Advocates like the Durham, North Carolina-based Center for Responsible Lending argue that payday lending is essentially usurious. Fees can result in annual interest rates as high as 521 percent, according to the bureau.
In his remarks, Cordray didn’t refer to directly to payday lending, but expressed concern about frequent users of short-term credit.
“The economics of the product are premised on the repeat use of the product by a certain subset of customers,” Cordray said. “Depending on the precise terms and conditions of such loans, they can greatly harm consumers rather than help them.”
The payday lending lobby has sought to defuse this criticism by emphasizing that they compete with other de facto lending products, such as checking overdraft fees.
Jamie Fulmer, senior vice president of public affairs for Advance America Cash Advance Centers Inc., a payday lender, said his company’s customers typically get eight loans a year. The company also offers customers in some states the ability to extend their loan terms. Advance America was acquired by Grupo Elektra SAB last year.
“We work with each customer to ensure they understand the terms of their loan and can repay it,” Fulmer said by e-mail.
At a field hearing in Birmingham, Alabama, on Jan. 19, 2012, Cordray said the agency hears “a lot” about repeated, long-term use of payday loans.
“We plan to dig deep on this topic to understand what consumers know when they take out a loan and how they are affected by long-term use of these products,” Cordray said at the time.
In his remarks yesterday, Cordray promised to work with state attorneys general when they encounter “jurisdictional issues” related to products that can lead to debt traps. For instance, Colorado attorney general John Suthers is attempting to investigate a payday lender that claims sovereign immunity because it is affiliated with a Native American tribe. Other states are probing lenders who operate offshore.
“We also recognize that effective enforcement of the law can be challenging when it comes to lenders that lack a physical presence,” Cordray said.
Sam Olens, the attorney general of Georgia, said attorneys general would welcome federal action to limit the ability of lenders to affiliate with Native American tribes.
“This is an area where Congress should tighten the laws,” Olens said in an interview.
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