Predatory short-term loans are the subset of small dollar credit products that strip wealth ... deceptive and unscrupulous business practices. ELEMENTS OF A ...
PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
ASSETS & OPPORTUNITY
OVERVIEW Predatory lending strips wealth from financially vulnerable families and leaves them with fewer resources to devote to building assets and climbing the economic ladder. Predatory lending spans a range of industries and products – from the housing and automobile industry to credit cards and student loan products. Predatory short-term loans are the subset of small dollar credit products that strip wealth from low- and moderate-income consumers. Lenders of these products charge exorbitant fees and interest rates, lend without regard to borrowers’ ability to repay, and continually refinance loans over a short period of time.1 Three of the most prolific wealth-stripping short-term loan products are payday loans, car-title loans and abusive installment loans. Payday and car-title loans are small, short-term loans of a few hundred dollars with average fees and interest the equivalent of an annual percentage rate (APR) of around 400%. They are marketed to cash-strapped customers as emergency loans to cover short-term expenses. Payday loans are secured by holding the borrower’s signed personal check or obtaining electronic debit access to their bank account. Car-title loans are secured by signing over the title of the borrower’s automobile, and in some states handing over a set of keys. If the borrower fails to pay back a car-title loan, the lender can take and sell the automobile, and, in some states even keep the surplus value of the car. Installment loans range from a few hundred dollars to multiple thousands of dollars and are typically made by finance companies. Unlike payday and cartitle lenders, installment lenders sometimes assess the ability of the borrower to repay, which means interest rates may be lower for consumers with better credit. Although installment loans are not an inherently predatory product, they become predatory when finance companies charge excessive fees and interest rates and continually pressure customers to refinance and take out new loans. Small dollar installment loans are generally targeted at low- and moderateincome families. Borrowers who use predatory short-term loan products often pay more for loans than other consumers. For example, a typical payday loan borrower takes out eight loans of $375 each per year and spends $520 on interest.2 Although the payday lending industry claims these loans are one-time loans, research has shown that the average payday borrower remains in debt for more than half of a year – double the length of indebtedness recommended by the Federal Deposit Insurance Corporation (FDIC).3 Only 2% of payday loans go to borrowers who can afford to pay off the loan the first time.4 The average car-title loans borrower is similarly unable to pay off the loan the first time. The chief executive of the largest car-title lender in the country stated in court papers that the average customer renews a car-title loan eight times, generating significant additional interest costs.5
Leah Plunkett, Emily Caplan, and Nathanael Player, Small Dollar Loan Products Scorecard – Updated (Boston: National Consumer Law Center, 2010).
Nick Bourke, Alex Horowitz, and Tara Roche, Payday Lending in America: Who Borrows, Where They Borrow, and Why, (Washington, D.C.: The Pew Charitable Trusts, 2012)http://www. pewstates.org/uploadedFiles/PCS_ Assets/2012/Pew_Payday_Lending_ Report.pdf
Uriah King and Leslie Parrish, Payday Loans, Inc: Short On Credit, Long On Debt (Durham, NC: Center for Responsible Lending, 2011).
Parrish, Leslie and Uriah King, Phantom Demand: Short-Term Due Date Generates Need For Repeat Payday Loans, Accounting for 76% Of Total Volume (Durham: Center for Responsible Lending, 2009).
Affidavit of John Robinson, President of Titlemax Holdings LLC, U.S. Bankruptcy Court for the Southern District of Georgia, Savannah Division (April 20, 2009).
CFED: ASSETS & OPPORTUNITY SCORECARD
WHAT STATES CAN DO While there are a number of strategies to curb payday and car-title lending, by far the most effective is to prohibit these loans outright or to establish a fair playing field by imposing an APR cap of 36%. Unlike most payday and car-title loans, small dollar installment loans – when responsibly regulated – can be a safe product. Therefore, rather than banning them altogether, the best policy is to cap these loans at 36% APR. States can also strengthen their Unfair and Deceptive Acts and Practices (UDAP) statutes to ensure that they cover predatory shortterm lending. State UDAP laws protect consumers from a range of predatory, deceptive and unscrupulous business practices.
ELEMENTS OF A STRONG POLICY7 Based on the expertise of the Center for Responsible Lending and National Consumer Law Center, CFED considers a state’s predatory small dollar lending policies strong if they meet the following criteria: 1. Does the state protect consumers from payday lending? States should protect consumers by prohibiting payday lending altogether or imposing an APR cap of 36% or less. 2. Does the state protect consumers from car-title lending? States should protect consumers by prohibiting car-title lending altogether or imposing an APR cap of 36% or less. 3. Does the state protect consumers from predatory short-term installment loans? States should impose an APR cap of 36% or less. 4. Does the state include short-term lending in basic consumer protection laws? States should ensure that their Unfair and Deceptive Acts and Practices statutes cover predatory short-term lending.
WHAT STATES HAVE DONE Ten states have prohibited or capped all three types of predatory loan products and include short-term lending in basic consumer protection laws. Fifteen states do not effectively regulate any of the three predatory loan products, although nine of these states include short-term lending in basic consumer protection laws. All other states protect consumers against some, but not all, predatory short-term loan products.
For more information on this policy measure, Protections from Predatory Short-Term Loans, and more, go to http://scorecard.cfed.org. In the Assets & Opportunity Scorecard, the 50 states and the District of Columbia were rated on their policies to protect consumers from predatory lending practices. The ratings were based on all four criteria described above. Assets & Opportunity Scorecard published by CFED. © CFED, October 2012. POLICY BRIEF: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS