New Data and Thoughts on Payday and Other Alternative Lending


The Consumer Financial Protection Bureau's new study (published 3/25/14) regarding payday loans has received substantial press coverage over the past couple days. The study focuses on repeat customers and finds that 80% of payday loans effectively are rolled over--that is, another loan is taken out within 14 days of repayment of the prior loan. (Some states have legislated cooling-off periods for payday loans; in those states, loans cannot be rolled over, but customers are free to come back a few days later.) The study further finds that the loaned amount goes up as loans are rolled over and that nearly 50% of all loans are in a sequence at least 10 loans long. This means that payday loans generally are not used by customers as short-term "stopgap" loans to keep them out of a cycle of debt. Rather, customers are in debt effectively for months, as Credit Slips contributor Nathalie Martin's research previously has suggested.

The study's release coincided with yesterday's Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection's hearing titled, "Are Alternative Financial Products Serving Consumers?" -- at which Nathalie testified. The hearing raises larger questions about the federal government's role in regulating the landscape of alternative lending. This includes payday loans and, as Nathalie noted in her testimony, similar short-term loans that are designed in part to bypass state laws regulating "traditional" payday loans.

Of course, the underlying problem is that a very large (and likely growing) segment of Americans are "underbanked" or "underserved" in that they do not have access to sufficient "ordinary" forms of credit because, among other reasons, they have low credit scores or live in low-income or rural areas. They thus turn to short-term credit products, which often come with triple-digit APRs and aggressive marketing tactics. However, a good portion of this segment of the population lives from paycheck to paycheck and likely will have trouble paying their monthly bills at some (or many) points during the year--and will want/need to take out a loan. Ensuring that the products they will turn to are safe and affordable is key, though how exactly to do that is open to vigorous debate.   

Right now, and as was highlighted during the hearing, I'm most interested in online lending, which seems to be expanding both in dollars loaned and scope of products offered. As alternative forms of lending move from storefront to online, federal regulations likely will become more necessary and important. Whatever legislation ensues will need to take into account the variety of short-term credit products available and the situations of borrowers.

As a starting point, the experience of states regulating storefront lenders may provide useful lessons in how to effectively and fully regulate the range of products accessed by the underbanked. The federal government also is in the unique position to combine some form of postal banking (blogged about previously here and here) with its regulation of short-term credit products, a topic that also was raised at the hearing. Regardless, short-term lending undoubtedly will remain a hot issue in the coming months and years.