CFPB findings may support prepaid's argument

On April 24, 2013, the Consumer Financial Protection Bureau released its findings concerning the small but growing payday loan and deposit advance loan markets in the United States. The CFPB's report may validate the argument posed by the prepaid card industry that prepaid cards offer a better, low-cost option for unbanked and underbanked consumers.

In examining the business practices of over 15 million storefront payday loans and data from multiple depository institutions that offer deposit advance products, the CFPB found that fees for storefront payday loans generally ranged from $10-$20 per $100 borrowed. "For the typical loan of $350, for example, the median $15 fee per $100 would mean that the borrower must come up with more than $400 in just two weeks," the CFPB said.

As for deposit advances, fees are typically about $10 per $100 borrowed, the CFPB found. "For a deposit advance with a $10 fee per $100 borrowed on a 12-day loan, for example, the APR would be 304 percent," the bureau said.

Debt spirals

The CFPB cited payday loans as leading users into cycles of debt. "The loose underwriting, the rapid repayment requirement, and the high costs all may contribute to turning a short-term loan into a very expensive, long-term loan," the agency said. "For consumers, it is unclear whether they fully appreciate the risk that they may end up using these products much longer than the original term. Or, that they may end up paying fees that equal or exceed the amount they borrowed, leading them into a revolving door of debt."

Almost half of all payday borrowers make at least 10 payday loan transactions yearly, while 14 percent undertook 20 or more transactions annually, according to the CFPB. "Payday borrowers are indebted a median of 55 percent (or 199 days) of the year," the agency said. "For the majority of payday borrowers, new loans are most frequently taken on the same day a previous loan is closed, or shortly thereafter."

Additionally, the CFPB noted that over half of deposit advance consumers borrow more than $3,000 per year, while 14 percent borrow at least $9,000 per year. "These borrowers typically have an outstanding balance at least 9 months of the year and typically are indebted more than 40 percent of the year," the agency said. "And while these products are sometimes described as a way to avoid the high cost of overdraft fees, 65 percent of deposit advance users incur such fees. The heaviest deposit advance borrowers accrue the most overdraft fees."

Bait and switch?

CFPB Director Richard Cordray said the study reveals payday and deposit advance loan products can morph from short-term, emergency loans into long-term, expensive debt burdens. "For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates," he said.

Editorial Note:

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