CRL Report Slams Payday Lenders
by Steve Cypher on Thursday, July 9th, 2009The latest report from the Center for Responsible Lending should be a wake up call especially to those consumers with bad credit.
Our job
At Auto Credit Express, it’s our business to match customers with bad credit who are in need of a car loan with automobile dealers that specialize in bad credit car loans. We readily admit that the interest rates on these loans can be high. Depending on the FICO score and credit history of the customer, interest rates can range anywhere from the low teens to the high twenties.
But for customers that cannot afford to pay cash for a car (at least a reliable one) and/or wish to reestablish their car credit, there is no alternative. Given these circumstances, we encourage our applicants to take a sensible approach to a bad credit car loan, i.e.:
• Know your credit score and credit history before you start shopping
• Work with a dealer that knows special finance and uses multiple lenders
• Consider a newer, inexpensive and reliable car to keep your payments as low as possible
• Come into the loan with as much of a down payment as you possibly can
By following these guidelines, bad credit car loan applicants will have a much better chance of improving their credit scores and successfully graduating to a lower interest rate on their next car loan.
Payday loans
Payday lending, on the other hand, seems to operate under an entirely different concept – especially if you believe the results of the latest study by The Center for Responsible Lending.
The stance of the payday industry has always been that this type of loan is actually a service to their customers. After all, if people use it (and millions do) every month, there must be a need for this kind of loan. In the words of Lyndsey Medsker, spokesperson for the Community Financial Services Association, a trade organization that represents the interests of the payday lending industry, “What happens without the option of taking out a payday loan? Does someone bounce a check? What would you recommend these people do?”
New CRL report
But according to a new report from CRL titled “Phantom Demand”, a full three quarters of the payday industry’s loan volume is generated by borrowers who, after repaying one payday loan, must take out another before their next paycheck.
Knows as “churning”, this repeat borrowing, which is encouraged by payday lenders (and backed up by the statements of former industry employees) places borrowers in a repeated cycle of borrowing that can have disastrous results on the already precarious financial situations of many middle and lower income borrowers.
Here are some of the findings of the report:
• Half of repeat loans are opened at the borrower’s first opportunity, immediately or after a 24-hour waiting period, depending on state rules.
• 87% of repeat loans are opened within two weeks, or generally before their next payday.
• Only 6 percent of subsequent payday loans are taken out longer than a month after a previous loan was paid off.
The conclusion of the report: the bulk of payday loan demand comes from borrowers who are taking out a payday loan to repay a payday loan.
Big business
Payday lending is also a huge business. According to a recent documentary by CBS News, there are 23,000 stores located in the U.S. – more than Starbucks and McDonalds combined. These storefronts, according to the CRL, originate 59 million churned loans, yearly, that generate more than $3.5 billion in fees.
“This is money that could be used for other things – savings for an emergency, paying off other debt,” said Leslie Parrish, senior researcher at the Center for Responsible Lending and co-author of the report. “So it’s really a huge loss for these families who are taking out a payday loan.”
The Bottom Line
At Auto Credit Express, we are in the business of helping our customers reestablish their credit. We also encourage our customers to act responsibly when it comes to taking on any type of personal debt.
We would also like to thank The Center for Responsible Lending for a most enlightening report.
It would be an irrational, bad business practice for payday lenders to fail to consider borrowers’ ability to repay and trap them in a cycle of debt. All reputable payday lenders have underwriting criteria, including a requirement that a borrower have a steady income and checking account.
State regulator reports show that more than 90 percent of payday advances are repaid when due.
“especially if you believe the results of the latest study by The Center for Responsible Lending.”
I don’t and you shouldn’t either. This outfit has a long history of manipulating information and grandstanding to acheive their questionable goals.
Have you checked their data and methods of gathering it? If not, you shouldn’t repeat this (mis)information.
The CRL is a poor choice for information. Their ’statistics’ have been debunked many times. They are committed to eliminating payday lending and have a vested interest in banks/credit unions that would benefit from the elimination of competition in the short-term credit market (i.e. overdraft fees would increase without consumers having the payday lending option to avoid them).
Find a more credible source. There are bad apples in the payday loan business, but it is ridiculous to assume all lenders are the same.
Statement of D. Lynn DeVault, board chair of Community Financial Services Association of America:
“Center for Responsible Lending cannot seem to look at data and apply a common sense analysis. Let’s be clear about the demand for payday advances. Consumers find themselves with an urgent need to pay a bill before payday. They survey their choices—payday advances, bank or credit union loans, overdraft protection, title loans, borrowing from family members, pawnshops or credit card advances. They also carefully weigh how much each will cost them in simple dollars and cents. Many choose a payday loan.
“Now we agree with Center for Responsible Lending that sometimes one payday advance is not enough. The financial hit the consumer took—a car repair, a hospital bill, a utility bill payment—might not be resolved. But after a payday advance, consumers still have all the other options. The fact they many choose another payday advance is evidence that we offer a strong alternative to the other services.
“We offer consumers a solution to short-term finanical problems. Center for Responsible Lending offers them sympathy and moral support.”
You can’t take anything from CRL from face value. One of their founders, Herb Sandler, is directly responsible for the mortgage meltdown that occurred last year.
Besides, payday lenders who belong to CFSA provide their custoemrs with an interest-free payment plan at least once a year. If the business was so dependent on repeat business this interest free payment plan would free consumers from the need for payday loans.
In reality the cost of overdraft and bounced check fees (which are two to four times as much as payday loan fees) drive consumers to utilize payday loans. Stop allowing financial institutions to charge such high overdraft fees and see payday lending decrease as well.
Pay Day Lender,
A steady income and checking account are not “underwriting criteria” but only a guarantee that the payday lender will have a source from which to collect their fees. Real criteria would include a debt to income analysis and a lack of this type of underwriting is what leads many payday borrowers to become trapped in the loan cycle.
The fact that 90 percent of payday advances are repaid when due does not reflect the fact that many of these payments are made from the funds secured by an additional payday loan and therefore these statistics are very misleading.
Mick,
I have checked their data and their methods and I would suggest that you do this as well. And as far as questionable goals, I believe that an interest rate ceiling of 36% is anything but questionable.
CRL, by the way, was not the only source for this article. Perhaps you’d also like to question the ethics of CBS News, as well.
J,
You obviously think I have something against payday lenders. This is not true. I believe that the short-term loan absolutely serves a purpose in the lending market.
My only quarrel with payday lenders is their lack of underwriting criteria and the obscenely usurious interest rates that they charge.
Mr Cypher,
Fair enough. Unfortunately, small loans would be more expensive to make if they had to be underwritten with the same standards as a mortgage loan or a car loan (we don’t have to talk about how those underwriting standards were compromised in recent years). I agree that some lenders charge outrageous fees, but what is a reasonable rate of interest for these types of loans? 36% APR would eliminate the product altogether. The Gutierrez bill sets a cap of 15% of the loan amount, which is still about 390%APR for a two week loan. APR is clearly not a good representation of interest for short term loans. The banks and credit unions really don’t like when you quote their overdraft fees in APR terms, either.
The solution is responsible legislation, which has been lacking. Politicians really don’t understand the product because they really don’t have any experience with it. ‘Consumer advocates’ such as the CRL and many, many other entities have their own agenda. It seems like the climate is for no regulation or overregulation. I think there needs to be some common sense applied here.
I always thought that these loans should have a limited period in which loans can be charged the contract rate of interest (such as $15 per $100 borrowed per pay period, but only for a certain number of pay periods until the loan is placed into a fully amortized repayment plan). The Gutierrez bill has some language to this effect, but it’s interesting to see that the opponents to this bill are those who think there should be no regulations alongside those who think the product should be banned.
Consumers are the ones who suffer because their interests are not being protected. I am not saying I am for the Gutierrez bill, but at least someone is making the attempt to compromise–small, short term credit is necessary, and could use some standard regulatory structure. This is what the CFSA advocates and the lenders that belong to it are the more reputable ones.
I’d like to say that the Center for Responsible Lending will NEVER conduct an unbiased survey because they have a set goal in mind before they even embark on such ventures. The CRL is certainly not a reliable source for information pertaining to the industry that they despise and wish to be completely eradicated. They stand to gain much from the elimination of the short-term loan industry and are known for manipulating data to get the results they are looking for. Even as an opposer of payday loans, you shouldn’t rely on the Center for Responsible Lending as an adequate source.
Lani,
The Center for Responsible Lending is not the only group that opposes the payday loan industry. Consumers Union – the organization that publishes Consumer Reports also opposes payday lenders.
As for your own statements about CRL, you back them up with absolutely no proof, whatsoever.