The Consumer Financial Protection Bureau (CFPB or Bureau) recently released a report presenting the results of several analyses of consumers’ use of payday loans. The report is considered to be a continuation of the CFPB’s report, Payday Loans and Deposit Advance Products, which was released in April 2013. It was prepared by the CFPB’s Office of Research and is intended to look more closely at consumers’ patterns of repeated borrowing. The CFPB states a primary driver of the cost of payday loans is the ability for consumers to roll over the loans or engage in re-borrowing within a short window of time after repaying their first loan.
The analyses focused on “loan sequences” or the series of loans borrowers take out following a new payday loan. The CFPB considers any loans taken out within 14 days of paying off a previous loan to be part of the same loan sequence. The report showed the renewal rates for payday loans is greater than 80 percent.
Coincident with the release of the report, CFPB Director Richard Cordray said the Bureau’s concern is not with every payday loan made to a consumer, but with the inability of some consumers to escape the cycle of debt. The Bureau is now “in the late stages” of determining an approach to formulating rules for this market that would protect consumers from what he referred to as “debt traps” while also assuring they will have access to a small loan market that is “fair, transparent, and competitive.”
Separately, the Financial Institutions and Consumer Protection Subcommittee of the U.S. Senate Committee on Banking, Housing, and Urban Affairs conducted a hearing in March to solicit testimony on whether alternative financial credit products serve consumers. Witnesses included both critics of the payday lending industry as well as critics of efforts to eliminate or control the industry. Most favored a federal law governing the industry instead of myriad state laws.