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The Consumer Financial Protection Bureau unveiled a new proposal to curb what it calls predatory lending practices by the payday loan industry. Payday loans often carry exorbitant interest rates and trap many Americans in a cycle of borrowing. The industry says the proposed rules would drive short-term lenders out of business and would take away a critical borrowing option for millions of Americans who find themselves in need of a quick infusion of cash. Yet some consumer advocates say the CFPB proposal does not go far enough. Diane and a panel of experts discuss the pros and cons of payday lending, and why there’s controversy over a proposal to regulate the industry.
- Richard Cordray Director of the Consumer Financial Protection Bureau
- Dennis Shaul CEO, the Community Financial Services Association of America, a trade group for small-dollar, short-term lending, including payday loans
- Jonnelle Marte Personal finance reporter, The Washington Post
- Alex Horowitz Senior research officer, Pew Charitable Trusts' small-dollar loans project
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Millions of Americans each year turn to payday lenders for small short term loans to help them out of a financial bind, but many of these borrowers soon find themselves in a cycle of increasing debt because of the high interest rates charged by payday lenders. The government's consumer finance watchdog has proposed new rules to rein in the industry.
MS. DIANE REHMHere to talk about these proposed rules for payday lending and what consumers need to know, Dennis Shaul of the Community Financial Services Association of America, Jonnelle Marte of The Washington Post and Alex Horowitz of the Pew Charitable Trust small-dollar loans project. But first, joining us by phone from Washington, Richard Cordray.
MS. DIANE REHMHe's director of the Consumer Financial Protection Bureau or the CFPB. And thank you so much for joining us, sir. Explain briefly how these so-called payday loans work and why so many see them as inherently abusive.
MR. RICHARD CORDRAYThank you, Diane. It's good to be with you. This is the new proposed rule that the Consumer Financial Protection Bureau has put out on payday loans, auto title loans and certain high cost installment loans. These are loans that typically translate into quick cash for consumers, often at very expensive prices, and loans that we have found, based on research into millions of such loans, typically end up trapping a significant number of borrowers into debt cycles of six, eight, ten, twelve loans that they cannot get out of and set them up to fail.
REHMSo what is your agency proposing to do?
CORDRAYSo we're proposing a general framework that on all such loans, the lender should have to make an assessment of the borrower's ability to repay before making the loan and make sure that the borrower can actually afford to repay the loan when it's due. What we're concerned about is that many consumers end up rolling over loans again and again. They end up paying far more in fees and interest than they ever borrowed in the first place.
CORDRAYAnd we want to cut off that debt trap and we have several approaches to do that.
REHMOf course, the industry argues that these rules would put thousands of payday lenders out of business and deprive many people of a service that most commercial banks don't provide, that of borrowing small amounts of money quickly.
CORDRAYI think what's become clear is that these rules would mean much needed reforms in the industry. There would have to be certain business practices that change. You could not base your business on trapping borrowers in debt and repeated rollovers that go on and on. We've said that it's much like getting into a taxi thinking you're just going to ride across town and finding yourself stuck in a cross country journey that's ruinously expensive.
CORDRAYBut it will mean reforms. And what we have seen so far, and I want to make clear where we stand, this is our proposed rule. It represents our best thinking to date. We are going to hear from all sides. We've already begun to hear from all sides. There are consumer groups who think it doesn't go far enough. There are industry members who think that it goes too far. We're going to listen to everybody and hear carefully what they have to say, but it's going to be an assessment on the merits of what they have to say.
CORDRAYIf people give us good reasons why some of this needs to be changed, we will consider changing it and that's the point of the notice and comment period that we've just launched that will extend over the course of the summer.
REHMTell me how much research you would expect these payday lenders to do to insure that someone can pay back a loan.
CORDRAYEssentially, they need to verify income of the borrower. They need to understand the major expenses that the borrower has to meet and then make an assessment of whether the borrower will be able to repay the loan when it comes due without reborrowing and rolling it over again and again, which is often the course that these loans take. We think that's a fairly straightforward assessment, but if people think that the details of that are too difficult or too burdensome, we want to hear more about why that's so and we will consider their thoughts before we finalize rules here.
REHMOf course, as we know from the housing bubble, there were a great many people who exaggerated their income and even the house sellers were exaggerating the income of the buyers. How far does the lender have to go to verify the information he or she is getting is accurate?
CORDRAYWell, Diane, you've pointed out a very important problem that we had in the mortgage market and, in fact, we have rules in place now -- they didn't even have to verify income at all. They could just -- no documentation loans were quite common in that marketplace before it all crashed and burned. So we've learned from that. But at the same time, a small-dollar loan for quick cash is not the same as a mortgage.
CORDRAYIt's a smaller obligation. But what we've seen is the repeat borrowing problem, what we call the debt trap, is the key problem in this market. It's the problem we're looking to address. We're not trying to cut off consumers from getting emergency loans for one-time problems, even if they roll the loan once or twice. But if people are being trapped in debt, and they're having to live their lives off these ruinously expensive loans, that's not a recipe for success and we are working to make sure that that problem is going to be addressed.
CORDRAYAnd, again, we have already heard from people who think we haven't gone far enough. We're hearing from industry we've gone way too far. None of that means we've reached the right answer. This is just our best thinking to date and we're interested in hearing from everyone in terms of details of why they think certain things should be either stronger or less strong and those are things we'll consider before we finalize a rule.
REHMI gather these new rules don't have to get Congressional approval, but you've got an awful lot of Republicans who seem unhappy with them.
CORDRAYWell, I don't measure what we do by whether Democrats or Republicans are happy or unhappy. We try to find the right answer to problems where we've done research on millions of loans for consumers. We want to make sure that consumers are protected, but that they have access to the kind of credit that they need for one-time expenses and one-time problems. We have, again, focused on the repeat borrowing problem that we have found to be rife in this marketplace.
CORDRAYWe've analyzed millions of loans. We've done several years of research here. This is our best thinking to date. But we are looking forward to hearing from people on all sides of this discussion.
CORDRAYSo that we can figure out how best to finalize rules that accomplish those objectives.
REHMYou said you've got a comment period coming. How long is that comment period?
CORDRAYIt extends from last week till September 14. And I imagine we're going to hear from many, many people across the country and our people will digest carefully what they say. Some of the people that you're gonna have on your show here are people we have heard from and will continue to hear from and we are very eager to hear what they have to say. Again, we don’t expect that when we put down our proposed rule that it represents perfect thinking and we are looking forward to hearing from people about how we can make these rules even more effective at accomplishing the main purpose, which is protecting consumers while maintaining access to credit that the need for small-dollar needs.
REHMI know your agency has done a great deal of research on this. Do you have any idea what the average amount of a payday loan is?
CORDRAYWell, typically, the short term payday loan is for $500 or less. There is some changes going on in the marketplace. Some of them are in reaction to what people perceive as the measures this Consumer Financial Protection Bureau is taking and we'll continue to watch and monitor how that evolves. But, again, the main problem is people who get into a loan...
CORDRAY...they can't get out of it, they get trapped in it and it ends up ruining their finances and ruining their lives. And interestingly, we have heard immense amounts across the country from faith leaders from all denominations ranging from some of the most progressive to the fundamentalist of ministers and they are uniformly concerned about what payday loans do to the members of their congregations and what they do to people's lives in their communities and that's something we're listening very hard to in order to try to address those issues.
REHMAre payday loans capped at 500 or can a consumer ask for a great deal more?
CORDRAYState laws vary. Typically, the two-week short term payday loan is capped at some lower level. There are longer term installment loans that can be made again under some state's laws. The laws vary considerably. We've learned a lot from looking at the different states, talking to state regulators, understanding what they do and what effect it has.
CORDRAYBut the overriding problem that we've seen that is pretty much uniform across the country where these loans are permitted is the debt trap problem. And that's what we are trying very hard and very focused on seeking to address.
REHMBecause you've seen interest rates just eat up a person's income?
CORDRAYAnd that's true both at storefront locations and online loans. Some of the online loans are even higher interest rates and we've seen, unbelievably, interest rates rising as high as well over a thousand percent in some cases. These are not recipes for long term success for consumers. If they can get in and out of a product, that's okay. We're trying to preserve access to that kind of credit. But if they're stuck in a debt trap, it's not going to be good for them, not going to be good for their families and as ministers tell us all over the country, it's not good for our communities. That's what we're seeking to try to address here.
REHMAll right. I want to thank you so much, Richard Cordray. He heads the Consumer Financial Protection Bureau. Thanks for being with us.
REHMShort break. Right back.
REHMAnd as we talk about new proposed rules for payday loans here in the studio, Dennis Shaul, he's CEO of the Community Financial Services Association of America. That is a trade group for small-dollar, short-term lending, including payday loans. Jonnelle Marte is personal finance reporter for the Washington Post, and Alex Horowitz is senior research officer for the Pew Charitable Trusts' small-dollar loans project. Alex Horowitz, tell us why you're not happy with this CFPB proposal. I know you've done lots of research on it.
MR. ALEX HOROWITZToday payday loans devastate consumers. The average borrower takes out a $375 loan but ends up in debt for five months, paying $520 in fees to repeatedly borrow that loan. This proposal does not sufficiently protect consumers from 400 percent APRs. If lenders pull a credit report and estimate certain expenses, they're allowed to continue making 400 percent APR payday installment loans. Endless paperwork will not keep payday lenders out of this market, but it will stop banks from making loans that cost six times less.
REHMDennis Shaul, you heard Richard Cordray call these payday loans a debt trap. How do you see them?
MR. DENNIS SHAULDiane, one -- thank you for having me, first. One of the things that has not changed over the course of the four years is the varying degree of conclusions with regard to the research that's been done. There is no uniformity here, and I am critical of both the work that has been done by Pew and also the work that has been done within the bureau.
MR. DENNIS SHAULOne of the things we had hoped for at the beginning was that the bureau would take such a position of neutrality that when it did research or when it compiled research, we could count on it. I don't think that has occurred.
SHAULI think they started with a predisposition on the product and did not go to the customer or the way it affects people. I think their predisposition was to believe that payday lending itself was always intractably a bad product.
REHMWhat about interest rates?
SHAULInterest rates are high, and the bureau is precluded from capping interest rates. States may do that, but in the legislation, there was a long discussion of whether or not an interest cap could be put forward for payday loans, and it was rejected by the Congress.
REHMHow do you see it, Jonnelle? I know you've been reporting on this for a while. You've heard Richard Cordray call it a debt trap, and you've heard Alex Horowitz say, you know, you've got a $375 average loan, and the consumer ends up paying a great deal more.
MS. JONNELLE MARTESo, you know, the feature to check and make sure that borrowers can pay back the loans is important, but I think that one of the more notable parts of the rule and what could actually have a bigger effect on borrowers and how they use them is the cap on the number of loans that you can take out in a row. As the CFPB found, 45 percent of borrowers end up taking at least four loans out, and so we've also seen at the state level that rules that limit the number of loans that you can take out in a row can affect and limit the number -- can really change the way people use them.
REHMHelp me to understand that. Are you saying a person comes in, borrows $375, supposedly for two weeks, is that it, and then comes back at the end of that two weeks, cannot repay that $375, takes out another loan?
MARTEThat's exactly how it works. And in that case the person would pay the fees that are due, be it, you know, 50 buck, or I mean it'll depend on the place, but what happens is they continue to pay the fee so that they can keep borrowing back that $400 or whatever it is. And by the end of it, you know, they may have paid more in fees than they borrowed.
REHMSo how many loans can an individual currently take under the existing regulations, Alex?
HOROWITZThat varies by state, but the average borrower ends up using eight loans over five months of the year, and the reason for that is when payday loans come due, they take 36 percent of an average borrower's gross paycheck. The average borrower earns about $1,200, biweekly gross. When a payday loan comes due, it takes more than $400 out of that paycheck. That leads them to borrow again and again, but the solution to that is to ensure that all loan payments are affordable, that they take up no more than five percent of a borrower's paycheck. That's an amount that most consumers can afford, and it gives them a clear pathway out of debt.
HOROWITZWhen Colorado enacted a reform similar to that, they ended up with a very successful payday loan market, with prices that are three to four times lower than other states, payments that take up five percent of a paycheck instead of 36 percent of a paycheck, and borrowers are saving more than $40 million annually in that state.
REHMDennis Shaul, what about that?
SHAULThe five percent thing is just, I think, a non-starter completely.
SHAULIt is not given -- it is not given out as a margin that will help the customers. It is really a measure to try to induce banks to come into this sector. We do think bank competition would be good, but we don't think the five percent rule -- if you were to borrow $350 for a month, what would you need as your monthly salary, under a five percent rules? $7,000. That doesn't make any sense for the borrower.
SHAULMoreover, this indicates a real failure to understand who the customer is. Let me give you an example. If you are expecting a tax refund and borrow in April, that would not be part of your monthly income. If you're a landscape person whose income varies from month to month but is stronger during the course of the year, the monthly standard would work against your borrowing.
SHAULIf you are a two-income family, and you are laid off or on strike, one of the two, then that diminution in income, precisely the reason you need the loan, would be a count against you because your monthly income would be less.
REHMAlex, do you want to comment?
HOROWITZSure, I mean, the five percent standard, loans shift to an installment structure, as they've already done in Colorado. Three of the largest payday lenders in the country, Advance America, ACE Cash Express, Check into Cash, they're operating in Colorado even though their laws change has already been in place for six years with payments that take up five percent or less of a borrower's paycheck.
HOROWITZWe end up with an installment structure, but lenders can operate profitably. That works well for consumers. Lenders are still in business six years after Colorado's law changed, using a standard that's very similar to five percent.
REHMAnd Jonelle, in your reporting, do you see a cap on interest rates as one possible solution for those seeking payday loans?
MARTEUp until now that is the way that states have been able to effectively ban the presence of payday loans in the area. The CFPB does not have the ability to set a cap on interest rates, and so what it has done is it has basically said that any loans that have interest rates above 36 percent, they will be subject to these new rules. But in 14 states and in the District, what the local legislatures have done is essentially cap the interest rates on these loans, typically at 36 percent, and...
REHMThirty-six percent seems awfully high.
MARTEYes, it is high, and I think that many consumers, if they are not able to access credit through the typical means, they understand and they expect to pay a high interest rate. But this is a level that has been found to be somewhat affordable or feasible. It's essentially the balance point where the lenders have an incentive to issue the loan, and the borrowers can afford it without necessarily, you know, struggling to pay their other bills.
REHMAlex, Dennis mentioned that banks may get into these payday loans. Are they already there in some areas?
HOROWITZBanks need clear guidance and clear standards in order to get into this market. They haven't had that to date, and they've waiting for CFPB rules to find out whether they'll be allowed to issue small-dollar loans. So today under the CFPB's proposal, if a lender verifies income, pulls a credit report and estimates certain expenses, we're going to see a $400 three-month loan that carries more than $350 in fees.
HOROWITZBanks are prepared to offer that same loan for $50 to $60 if there's a five-percent standard in the CFPB's rule that would allow them to do so.
SHAULI don't think that that is a factual statement at all, and there are two points that are really a major problem here. The idea that the customers who come to a storefront payday lender will migrate to the bank, after the banks have left in droves the same neighborhood that the storefront is in, bespeaks a failure to understand the culture that's there.
SHAULA bank with its guards, its dogs, its caged tellers, is not at all the same atmosphere as a storefront lender. So that's a real problem.
REHMSo you're saying consumers who need these payday loans are fearful of walking into those banks?
SHAULThe -- it is a totally different cultural experience. Beyond that, we've seen, we once had, payday lending being done under a so-called cash advance or payroll advance program with banks, which we favored and still do. But it did not in any way take up the demand for the product. And this five percent rule, again think about what five percent is. It's one-20th of your monthly income. Does anyone believe that the 16 million-or-so people who are using payday lending will all be in the category that the five percent rule would apply to? Of course not.
SHAULSo it is not in anything -- anything but a palliative. In fact, it is an attempt to answer the question that the bureau hasn't answered, and that is if you obliterate or do away with the industry, where do these people go. And believe me, they're not going to banks.
REHMYeah, and certainly that is a question posted on our website. If payday lenders are reined in, then what happens? Do the former borrowers become financially responsible, or do they borrow from people who collect debts with a baseball bat? Jonnelle.
MARTESo up until now, we have not seen banks step up and fill this need for small-dollar loans. They have met the demand. That's why we have payday loans. And, you know, in the cases where they did have this kind of lending, it came under intense scrutiny because the rates can be high. But we are seeing some start-ups come in and offer services that target people who have unsteady paychecks. For example there is one app called Even where they look at the person's month -- week-to-week income, come up with an average and then front the loan for the consumer on the weeks where that person is expected to be low or when their paycheck is low, and there are other programs out there.
MARTEAnd so I think really what we're going to see is more innovation in the financial -- so-called thin-tech world but also a pressure on all of the parties involved to come up with a solution that makes sense.
REHMSo are you saying that loans you can get online take a little more care with the examination of income than do these storefront loans?
MARTEI think what happens is that with some of these -- and another thing that's happening is these peer-to-peer loans, where, you know, someone like you and I, we could go online and say, well, we want to help fund this person's loan, and it's -- the financing is coming from consumers and retail investors. But essentially it's a -- what these other companies are offering is a different lending model, different lending standards, different ways of rating a consumer. And I think that that's what some people are pushing for.
REHMAnd you're listening to the Diane Rehm Show. Alex, what's your reaction to what Jonnelle has just talked about in terms of online loans?
HOROWITZOnline payday loans are even more expensive than storefront payday loans. They carry APRs averaging about 650 percent. So that's 25 percent per pay period. What's interesting, though, is that every payday loan borrower in the country has two things in common, an income because that's required to get a payday loan, and a checking account because it's required to get a payday loan. These are not the unbanked. These are customers who are using banks already, that have a checking account, and if credit were available at their bank that cost six times less, had affordable installment payments of no more than five percent of their paycheck, that would save millions of borrowers billions of dollars annually.
REHMSo Dennis, it does sound as though these folks are using banks.
SHAULThey are using banks only impersonally. Writing a check is very different from going in and getting your money on the same...
REHMBut they do have a relationship with the bank?
SHAULThey have a relationship that is totally impersonal. The loan becomes a personal item. We have to recognize that...
REHMPlease explain that for me. You're saying that an individual would be embarrassed or intimidated...
SHAULCulturally distinct from a banking customer. Anyone can use a checking account without going into a bank. The bank's presence is not a storefront presence. You've got to remember that in the neighborhoods where storefronts are, by and large the banks have abandoned these neighborhoods. I think that is a social problem that ought to be discussed in a larger context.
SHAULBut I do think that it will be very difficult to get people to go into a bank to borrow money, and I also think it is highly unlikely that a bank will have the feature that payday lending has, where the bank supplies the cash instantaneously, without a wait of 24 hours. One point I just really would like to make, Diane, and that is -- well actually two. We don't -- the model we're talking about is not the Colorado model. That would be deserving of its own discussion.
SHAULAnd the second point is online lending...
REHMWell what model are you talking about versus the Colorado model?
SHAULWell, I think -- I think there are many possible reforms out there that are going on at the state level now.
SHAULUtah for example is experimenting with a situation where after two -- three loans, excuse me, three periods in which the borrower has the right to repay and fails to do so, then that borrower must be put in what's called an extended pay plan. All interest ceases, and the person is given as much time as is necessary to pay off the principal. It seems to me that that is a much better approach because it isolates the customers who are in trouble and gets them a remedy.
REHMWhat about that, Alex?
HOROWITZIn Colorado, having $500 out for six months of the year, costs about $250 in fees. That's not cheap. But in Utah it costs more than $900 in fees. That's not consumer protection.
REHMAll right, we're going to take a short break here. When we come back we've got lots of callers, lots of email. I want to hear what you have to say. Perhaps you can share your own experience with payday lending. Stay with us.
REHMAnd it's time to open the phones as we talk about payday lending and the concerns about interest rates. About regulations that may be changed. Let's go first to Rachel in Redlands, California. You're on the air.
RACHELIt's certainly a privilege and a pleasure to speak with you.
RACHELAnd listen to you. Yes, I was a professional with a very good income, but I had some adverse circumstances of prolonged divorce and cancer diagnosis simultaneously.
RACHELSo, I became financially desperate and I began using the payday loans. And I've used, I think, all of the companies that were mentioned previously. But I wanted to speak of my most recent experience, and I'm sure I can't name the company on the air. But I borrowed 800 dollars and fortunately, I sold a piece of real estate and I became in a better financial position. So, I paid the 800 dollars back in about seven weeks. It was an installment rather than the payday to payday loan.
RACHELBut it was with a payday loan company. And I ended up paying about 1800 dollars in fees and interest for that 800 dollar loan. And when I did pay the loan off, I owed more than what I had borrowed originally.
REHMIs that typical, Jonnelle?
MARTEYes, it is. So a lot of the lenders, in anticipation of these rules, have moved to an installment model. And unfortunately, those can also come with interest rates that are just as high as the payday model.
HOROWITZWe conducted 22 focus groups with borrowers around the country, as well as national representative surveys. And unfortunately the story you just heard is more common than not. 75 percent of all payday loans go to borrowers who use 11 or more in a year. And in two thirds of states, payday and auto title lenders have already switched to installment loans or lines of credit that typically have APRs above 300 percent to get ahead of the CFPBs rules.
REHMSo, as you hear that then, sounds as though 1800 for 800 borrowed is a pretty hefty interest rate.
SHAULMore than hefty. I don't know how, precisely how this can be the limit on payday lending in California is effectively about 275 dollars. Now, there are exceptions under the California law for certain kinds of loans, but I do not know under what exception this would fall. Basically, California has a state -- a limitation of 300 dollars less, so you wind up with 275 on a payday loan. And then I think the jump, logically, if I understand the legislation there, is somewhere 1500 and up.
SHAULSo, I am not certain how this fits. But look, that kind of interest rate wherever it appears, is too high. There's no question about that. Nobody's arguing about that. The, the, the notion that this is the common experience just is not true. It is not the common experience. And the research that has been done, most notably by Clarity and the 1.0 suggests that only 10 to 15 percent of those who borrow are, by the definition of the CFPB, harmed. So it is, it's a little difficult for me to get a grip on the story, frankly.
MARTESo, I think that as in any case, it will depend on your individual circumstance and how quickly you can pay back the loan.
REHM10 to 15 percent, Alex.
HOROWITZWell, the average borrower takes out a 375 dollar loan, ends up paying 520 dollars in fees over the course of a year. So, that's really the rule, not the exception. And the reason for that is that payments are far larger than borrowers can afford. And the payday loan market is not price competitive. There's a reason why payday lenders charge four times more in Ohio and Wisconsin and Texas than they do in Colorado.
SHAULAgain, we don't have the Colorado rule in front of us. I think it's very important to say, Colorado is different from what has been put forward by the CFPB.
HOROWITZSo, the Colorado standard is very similar to the five percent payment standard that banks would use to make loans that cost six times less than payday lenders over the course of the year. Under the CFPB's proposal, unfortunately, if payday lenders pull a credit report, verify income and estimate expenses, they would be able to continue issuing 400 percent APR payday installment loans and that's a real problem for consumers.
MARTEThere have been several models that have been tried out at this point and it seems that the one that has had the biggest blow to the industry is what Washington state did, which is where they said, well, we're going to cap the number of loans that you can take out in a row at eight. And after that happened, as my colleague Chico Harland reported, there were 450 of the 603 payday locations shut down several years later. So, I think that that says something about how people are using the loans and where the money is coming from.
REHMInteresting. Here's an email from Greg in Florida, who says the most important thing about these payday loans is that they do not check your credit at all. If that changes, it will kill the industry for those who have bad credit. Most use these loans because they have bad credit. Do you agree with that?
SHAULI agree that many who use payday loans do not have a great credit score. It is simply not true that people who are screened do not undergo a credit report. That is not a fact, at least...
REHMBut are they screened?
SHAUL...yes, they are.
REHMHow extensively are they screened?
SHAULThey are. Diane, one of the things that's consistently missed in this is no one makes a loan thinking that it's not going to be paid back. You can't run a business where you're loaning money with the idea that people won't pay them back. So, there is screening. There is both the job, the credit report, the past credit history is important. So, to say that it isn't a part of it. Now, one of the things that's important here, in deference particularly to the caller, is payday lending is not monolithic.
SHAULWe have payday stores, we have payday online. We have payday done by tribes. We have payday done illegally. And unregulated offshore. And one of the things that isn't being talked about in a state like Washington state, you can demonstrate that people who have been screened out, as it were, by legislation, turn increasingly to offshore entities for their loans.
REHMLet me ask you this. If a person who's in, say, a part time job, goes to a payday lender and has a checkbook and asks for say, a 1000 dollars. How long does that credit check take?
SHAULWell, first of all, I can't -- I don't know where you would ask for 1000 dollars in payday. That's a very, very high standard. I'm trying to think.
REHMWell, let's say 500 dollars.
SHAULLet's 500, yeah, 500. Generally speaking, it can be done almost instantaneously.
REHMThat's what I wonder about. And how extensive that investigation actually is as to the consumer's ability to repay the loan promptly.
SHAULWell, let's remember that for the most part, we're talking about an average, as Alex just said, of 300, 325, 350. You can only do so much underwriting at that point, but underwriting would consist of determining that you have a bank account. Determining that you have a job, and a credit report review.
REHMIs that enough, Alex?
HOROWITZSo, payday loans today are made based on ability to collect, not ability to repay. The payday lender takes access to the borrower's checking account as a condition of making the loan.
REHMTakes access. What does that mean?
HOROWITZSo, a borrower gives their checking account on payday as their collateral for the loan. They do that by writing a postdated check or giving the lender authorization to electronically debit their checking account. That's why payday lenders make loans that take up 36 percent of a borrower's next paycheck. Even though people are already struggling to pay expenses and they can only afford five percent.
REHMAll right. Let's go to Ann Arbor, Michigan. Alex, you're on the air.
ALEXThank you for taking my call, Diane.
ALEXI formerly worked for a payday lender here in the state of Michigan. And while, I know the rules change from state to state, listening to your panel, there is, at least as far as Michigan is concerned, variances that seem to be happening that Alex and your speaker on behalf of the industry, are both correct. But at the same time, both missing the overall point. I think the regulation needs to be focused more on specially, people with fixed income, social security, disability income, pensions, things like that.
ALEXBecause what I was able to tell when I ran a branch for the company I worked for was that I could predict in advance which individual is coming back to re-borrow in two weeks, three weeks, four weeks, whenever their loan was due. And in Michigan, we have a set fee schedule, which means I cannot charge more than X per 100 dollars. And it capped out at 76 dollars for a 600 dollar loan. And I would find that the majority of my clientele would come in, pay the loan off in full, and immediately sign the application for a new loan. Beyond that...
REHMSo, if one does that, presumably, he or she is paying the amount due on that particular loan. Then taking out another loan. And I guess that can go on indefinitely.
HOROWITZThat's correct. That's why 80 percent of payday loans are rolled over, because they take up such a large share of a borrower's paycheck that most consumers can't afford to pay back -- to pay their expenses without taking another loan.
REHMAll right. Let's go to Cleveland, Ohio. You're on the air, Anne.
ANNEThank you for taking my call. I have a very hard time understanding Dennis's point that if there were limits, say 5, 10, 15, 25 percent put on fees and interest, that that would drive the payday lenders out of business. But the second point that I would like to know as a citizen, how much money does the payday loan industry give to legislators in various states and also in the Congress? I know from reading the paper in Ohio that it's probably impossible for reasonable payday loan rules to be passed because, quite frankly, there's a lot of money going to the legislators.
REHMNow, there has been some in the press about Debbie Wasserman Schultz and her connection to payday lenders. Jonnelle.
MARTEYeah, so she has been -- it has been reported that she's received support, financial support from some payday lenders. And up until the rules were announced, before the rules were announced, she was in support of a bill that would have essentially blocked the rules for two years to give the states a chance to come up with their own regulation.
REHMAnd then, didn't she reverse her position?
MARTEYes. And so, she did face pressure from other Democratic leaders, Elizabeth Warren is a notable one. After the rules were announced, she came out and changed her mind and said on Friday that she does in fact support the rule and stands with the CFPB.
REHMInteresting. And you're listening to The Diane Rehm Show. Dennis, it does seem to me to come down to a question of what you believe a reasonable amount of interest would be for payday lenders to take the risk that they are taking as they loan money and to make a reasonable profit on that lending market.
SHAULWell, the first point is, they're not making an unreasonable profit now. If you compare our rate of return verses almost any other entity, we're down there with a rate of return that grocery stores make.
REHMWhat is your rate of return?
SHAULIt is most, in most cases, it is comparable to what grocery stores make.
REHMNo, no. Please tell me the amount.
SHAULI don't know the exact percentage.
REHMWe do know that grocery stores say that their rate of return is two to three percent.
SHAULYes, and I say, and ours is under five. That would be an accurate...
REHMAnd would agree with that, Alex?
HOROWITZWell, what's extraordinary about payday lending is not the profitability, it's the inefficiency. The average payday loan store only serves 500 unique customers per year. That is a remarkably small number to run a retail establishment. Two thirds of payday loan revenue goes to cover overhead. Only one sixth goes to cover losses. That speaks to why diversified businesses are much better positioned to offer these loans. And it explains how payday lenders stay in business in Colorado, charging about 120 dollars in fees to borrow 400 dollars for three months.
HOROWITZWhen in a state like Ohio or Wisconsin or Texas, they charge four times that much in fees. But in both cases, they're still in business. It also explains why banks have such a large comparative advantage here and why they would be able to lend 400 dollars for three months for 50 to 60 dollars if there were a five percent standard in the CFPB's rule.
REHMSo, what does the CFPB have to do, in your view, to make these rules more fair for the borrower and for the lender?
HOROWITZThe CFPB, rather than vague underwriting guidelines, that some payday lenders have supported, in the CFPB's rules, should set clear standards for affordability that cannot be gamed. Limit payments to five percent of the borrower's paycheck. That would lead to no reduction in the availability of credit. It would lead to installment loans that are due over six months rather than loans that are due back in two weeks. And it's also very important that the CFPB bring lower cost lenders into this market.
HOROWITZThe CFPB does not have the power to set interest rates, so their real power to bring down prices is to enable lower cost lenders like banks and credit unions to offer small dollar loans to their customers, who already have checking accounts there, but are going to payday lenders when they're looking to borrow a few hundred dollars.
REHMSo, what do you, Dennis, see as what needs to be done?
SHAULThe five percent rule will not, in any way, meet the demand that is out there for payday loans. It really screens the best customers toward the banks. And let's not forget, we've had a bank experiment, run by the FDIC, and it was a failure. So, we are not exactly banking on the banks to come back into this area, both from regulatory points of view, nor from the business point of view. I would further suggest one thing. This contraction of credit, which is real, if you go to something like a five percent rule, will amaze you in terms of the results.
SHAULBecause the unintended consequences will be to flourish the market that already exists with offshore, unregulated payday lenders.
REHMDennis Shaul. He's CEO of the Community Financial Services Association of America. Jonnelle Marte is Personal Finance Reporter for the Washington Post. Alex Horowitz, Senior Research Officer for the Pew Charitable Trusts' Small Dollar Loans Project. More to be said about this, I'm sure. Thank you all for being here.
REHMAnd thanks, all, for listening. I'm Diane Rehm.
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