To assist the communities we serve, Hiilei Aloha, LLC and Alu Like, Inc. are collaborating to bring Business Planning for Non-Profits in Hilo. This FREE one day event will occur on March 4, 2015 from 9:00 a.m. – 12:00 noon. Seating is limited to 15 people. Registration forms need to be received before/on March 2, 2015.
FOR IMMEDIATE RELEASE:
April 24, 2013
Office of Intergovernmental Affairs
Tel: (202) 435-9572
CONSUMER FINANCIAL PROTECTION BUREAU FINDS PAYDAY AND DEPOSIT ADVANCE LOANS CAN TRAP CONSUMERS IN DEBT
Sustained Use of Loans Raises Consumer Protection Concerns
WASHINGTON, D.C. —Today the Consumer Financial Protection Bureau (CFPB) issued a report on payday and deposit advance loans finding that for many consumers these products lead to a cycle of indebtedness. Loose lending standards, high costs, and risky loan structures may contribute to the sustained use of these products which can trap borrowers in debt.
“This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,” said CFPB Director Richard Cordray. “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.” The Payday Loans and Deposit Advance Products report is at: http://assetshawaii.org/r/D/NjY5MA/MTM4/0/0/a3JoY2FpQHlhaG9vLmNvbQ/aHR0cDovL2ZpbGVzLmNvbnN1bWVyZmluYW5jZS5nb3YvZi8yMDEzMDRfY2ZwYl9wYXlkYXktZGFwLXdoaXRlcGFwZXIucGRmIyEjIQ/0
The report found that payday loans and the deposit advance loans offered by a small but growing number of banks and other depository institutions are generally similar in structure, purpose, and the consumer protection concerns they raise. Both are typically described as a way to bridge a cash flow shortage between paychecks or other income. They offer quick and easy accessibility, especially for consumers who may not qualify for other credit. The loans generally have three features: they are small-dollar amounts; borrowers must repay them quickly; and they require that a borrower repay the full amount or give lenders access to repayment through a claim on the borrower’s deposit account.
The CFPB study is one of the most comprehensive ever undertaken on the market. It looked at a 12-month period with more than 15 million storefront payday loans and data from multiple depository institutions that offer deposit advance products.
Key Finding: Payday and deposit advance loans can become debt traps for consumers
The report found many consumers repeatedly roll over their payday and deposit advance loans or take out additional loans; often a short time after the previous one was repaid. This means that a sizable share of consumers end up in cycles of repeated borrowing and incur significant costs over time. The study also confirmed that these loans are quite expensive and not suitable for sustained use. Specifically, the study found limited underwriting and the single payment structure of the loans may contribute to trapping consumers in debt.
Loose Lending: Lenders often do not take a borrower’s ability to repay into consideration when making a loan. Instead, they may rely on ensuring they are one of the first in line to be repaid from a borrower’s income. For the consumer, this means there may not be sufficient funds after paying off the loan for expenses such as for their rent or groceries – leading them to return to the bank or payday lender for more money. ·
Payday: Eligibility to qualify for a payday loan usually requires proper identification, proof of income, and a personal checking account. No collateral is held for the loan, although the borrower does provide the lender with a personal check or authorization to debit her checking account for repayment. Credit score and financial obligations are generally not taken in to account. ·
Deposit Advance: Depository institutions have various eligibility rules for their customers, who generally already have checking accounts with them. The borrower authorizes the bank to claim repayment as soon as the next qualifying electronic deposit is received. Typically, though, a customer’s ability to repay the loan outside of other debts and ordinary living expenses is not taken into account.
Risky Loan Structures: The risk posed by the loose underwriting is compounded by some of the features of payday and deposit advance loans, particularly the rapid repayment structure. Paying back a lump sum when a consumer’s next paycheck or other deposit arrives can be difficult for an already cash-strapped consumer, leading them to take out another loan. ·
Payday: Payday loans typically must be repaid in full when the borrower’s next paycheck or other income is due. The report finds the median loan term to be just 14 days. ·
Deposit Advance: There is not a fixed due date with a deposit advance. Instead, the bank will repay itself from the next qualifying electronic deposit into the borrower’s account. The report finds that deposit advance “episodes,” which may include multiple advances, have a median duration of 12 days.
High Costs: Both payday loans and deposit advances are designed for short-term use and can have very high costs. These high costs can add up – on top of the already existing loans that a consumer is taking on. ·
Payday: Fees for storefront payday loans generally range 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. A loan outstanding for two weeks with a $15 fee per $100 has an Annual Percentage Rate (APR) of 391 percent. ·
Deposit Advance: Fees generally are about $10 per $100 borrowed. For a deposit advance with a $10 fee per $100 borrowed on a 12-day loan, for example, the APR would be 304 percent.
Sustained Use: 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. 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. ·
Payday: For payday borrowers, nearly half have more than 10 transactions a year, while 14 percent undertook 20 or more transactions annually. Payday borrowers are indebted a median of 55 percent (or 199 days) of the year. For the majority of payday borrowers, new loans are most frequently taken on the same day a previous loan is closed, or shortly thereafter. ·
Deposit Advance: More than half of all users borrow more than $3,000 per year while 14 percent borrow more than $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. 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.
The CFPB has authority to oversee the payday loan market. It began its supervision of payday lenders in January 2012. The CFPB also has authority to examine the deposit advance loans at the banks and credit unions it supervises, which are insured depository institutions and credit unions, and their affiliates, that have more than $10 billion in assets. Today’s report will help educate regulators and consumers about how the industry works and provide market participants with a clear statement of CFPB concerns.
While today’s study looked at storefront payday lenders, the CFPB will continue to analyze the growing online presence of such businesses. The Bureau is also looking at bank and credit union deposit account overdraft programs which provide short-term, small-dollar, immediate access credit services. The CFPB will publish initial results from this overdraft study later this spring.
To help educate consumers about payday and deposit advance loans, today the CFPB updated its Ask CFPB web tool to assist consumers with their financial questions about these products.
A factsheet about payday and deposit advance loans is available at: http://assetshawaii.org/r/D/NjcwMg/MTM4/0/0/a3JoY2FpQHlhaG9vLmNvbQ/aHR0cDovL2ZpbGVzLmNvbnN1bWVyZmluYW5jZS5nb3YvZi8yMDEzMDRfY2ZwYl9wYXlkYXktZmFjdHNoZWV0LnBkZiMhIyE/0
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.
Great news Ho’owaiwai Networkers!
After years of collective work by the Ho’owaiwai Network and its supporters, the Governor recently signed HB 868 into law, which eliminates the asset test for recipients of benefits under the Temporary Assistance for Needy Families (TANF) program! We are only the 7th state to do so!
In preparation for a larger press release to celebrate the efforts of the Ho’owaiwai Network, we wanted to see if any of our partner organizations is interested in contributing to the documentation of this huge, huge achievement. We are generally looking for the following:
A client or family you have worked with who will directly benefit from the passing of this legislation and is willing to share their story
Stories from your own organizations around the efforts you have put in to ensure the passing of this legislation.
Any other related story!
If you are interested, please contact Brent Kakesako, Chief Operating Officer of the Hawai’i Alliance for Community-Based Economic Development (HACBED) via email (firstname.lastname@example.org) or phone (808-550-2661) by Friday, May 10.
Mahalo for all of your efforts to build assets of families across Hawai’i to increase their self-sufficiency and control over their daily lives!
FDIC Features Consumer Tips on Hot Topics for National Consumer Protection Week
Other FDIC resources for consumers also highlighted
FOR IMMEDIATE RELEASE
Jay Rosenstein (202) 898-7303
- How to shop for an auto loan;
- Advice on borrowing money to pay for college;
- How long to keep documents such as bank statements and credit card bills; and
- Tips for managing a mortgage.
The FDIC’s Greatest Hits: Some of Our Most Popular Articles for Consumers
There are good reasons to hang on to financial documents such as receipts, bank statements and credit card bills, but how long should you keep them?
Internet commerce is fast and convenient, but it pays to take precautions.
If you’ve found records of an old bank account, certificate of deposit (CD) or safe deposit box, here are tips to help you research and perhaps recover something valuable.
Your credit report plays a large role in determining whether you’ll be approved for a loan, insurance or an apartment. So, it’s important to know what’s on your credit reports and how to rebuild your credit history after a financial setback.
These CDs have the potential to earn more than traditional, fixed-rate CDs, but there are questions you should ask before you purchase one.
The cost of higher education continues to go up, as does the debt students and caregivers often take on to finance it. Here are tips to avoid debt overload.
Take this self-test to help you decide which bank account is best for you.
An auto loan is a big expense for most people, so research your options before committing to a loan for a car purchase.
Many consumers use debit, credit and prepaid cards interchangeably, but they are quite different in how they work and the consumer protections available. Be sure to know the differences before you use them. http://assetshawaii.org/r/C/NjE0NA/MTM4/0/0/a3JoY2FpQHlhaG9vLmNvbQ/aHR0cDovL3d3dy5mZGljLmdvdi9jb25zdW1lcnMvY29uc3VtZXIvbmV3cy9jbnN1bTEyL3BheW1lbnRjYXJkcy5odG1sIyEjIQ
Purchasing a home is a huge financial undertaking, so it’s important to carefully manage your mortgage. Here are some tips.
The short article below helps explain why eliminating asset limits is a good idea.
Click here for the article.
There are many different types of poverty, but the Asset Opportunity Unit at the Shriver Center focuses on asset poverty. Asset poverty means having insufficient funds to meet one’s needs for three months if income were to disappear for those three months. Focusing on asset poverty is important because assets are the building blocks for economic mobility and financial stability. While income poverty looks at whether people have enough to get by, asset poverty looks at whether people have enough to get ahead.
One way to measure the asset poverty level of a family of four, for example, is to multiply the Federal Poverty Level (FPL) by three months. Based on this calculation, an Illinois family of four would need $5,762.50 in savings to live for three months if they had no other source of income. Putting aside whether the current FPL is a sufficient measure of poverty, the question is whether most families, let alone low-income families, have even this much set aside.
For low-income families receiving public benefits the answer is likely no. This is because asset limits in public benefit programs prevent such families from building a level of resources necessary for future needs. For instance, in Illinois, the asset limit for Temporary Assistance to Needy Families (TANF) is $2,000. Thus, if a family has more than $2,000 in savings, they are not eligible for TANF. In other words, Illinois’s TANF asset limit is only about one third of what a family would need to stay above the asset poverty level. Given such archaic limits, it is no wonder that families remain in poverty and reliant on public benefit programs.
For years, advocates have argued that states should either eliminate their public programs’ asset limits entirely or, at a minimum, increase them to limits more reflective of today’s economic realities. As advocates correctly note, asset limits are a relic of entitlement program policies that no longer exist. Cash welfare programs, for example, now focus on quickly moving individuals and families to self-sufficiency, rather than allowing them to receive benefits indefinitely. Since personal savings and assets are precisely the kinds of resources that allow people to move off public benefit programs, continuing to utilize asset limits runs counter to this policy.
Nevertheless, states have been reluctant to reform asset limits. Although most states have eliminated asset limits in the Supplemental Nutrition Assistance Program (SNAP), and some states have eliminated them in Medicaid, the majority of states still have them in TANF. Most often, fear about increased numbers of people who have significant assets enrolling in public benefit programs is given as a reason for not changing such limits. Yet, a recent study from the New America Foundation shows that in states where asset limits have been eliminated no such increases have occurred. Moreover, the study shows that eliminating asset limits actually reduces administrative costs and time per cases, which allows caseworkers to take on more cases, without increasing workload or administrative costs.
The report, which analyzed the results of interviews and surveys of public benefit administrators in eight states, confirmed previous research that found that most applicants to SNAP and TANF have very few assets anyway and that eliminating asset tests would not significantly increase eligibility. In fact, currently in the majority of states studied very few families were denied program participation due to excess assets anyway. In Idaho, only 2.2% of SNAP application denials were due to excess assets. Thus, an overwhelming increase in cases is unlikely. This is true despite widespread belief that eliminating asset tests will allow wealthy individuals to “game” the system.
The report also noted that eliminating asset limits reduces administrative costs, and the fiscal benefits to the state can outweigh any costs incurred. In Iowa, for instance, direct state costs for eliminating asset limits in its SNAP program were estimated at $702,202, but the overall benefit to the state would be $12.3 million from additional SNAP benefits and increased state employment. Oklahoma determined that eliminating the Medicaid asset limit in 1997 saved approximately $1 million in administrative costs.
The study provides powerful data that advocates can use to convince policy makers that their perceptions about the benefits of asset limits are incorrect. Additionally, these data support advocates’ assertions that, despite what states such as Pennsylvania and Michigan apparently believed when they reinstated asset limits in their public benefit programs, eliminating asset limits is not only necessary for the economic stability of low-income families, but also cost effective for. As the economy begins to improve, now is not the time for states to regress in important policy reforms that will help families become financially self-sufficient.
This blog post was coauthored by Alex Hoffman.