Alert April 30, 2013

CFPB Releases Initial Findings on Payday Loans and Deposit Advance Products

The CFPB released its report and factsheet on the findings of its first major study on storefront payday and deposit advance loans. According to Director Richard Cordray, the CFPB found that there is "not much difference, from the consumer’s perspective, between payday loans and deposit advance loans" and the two products "have similar purposes and …similar usage by consumers." As detailed in the CFPB’s report, payday and deposit loan products can lead to a cycle of indebtedness for consumers. The CFPB noted its focus on "sustained use"—the long-term use of a short-term high-cost product evidenced by a pattern of repeatedly rolling over or consistently re-borrowing resulting in the consumer incurring a high level of accumulated fees. The CFPB found that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis. The CFPB attributed the "absence of significant underwriting" and "current repayment schedule" to the risk that some borrowers are caught in a cycle of high-cost borrowing over an extended period of time. For example, the report found that the median consumer conducted 10 transactions over a 12 month period and paid a total of $458 in fees, which did not include the loan principal.

The CFPB also announced it is separately analyzing the borrowing activity by consumers using online payday loans, and that it is already looking at bank and credit union deposit account overdraft programs that provide short-term, small-dollar immediate access to credit. Results from the CFPB’s study of overdraft practices are expected later this spring.