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Brief: Payday Lending General Description: Annually twelve million adults use payday lending, accounting for $7.4 billion in national payday loan volume (Bourke et al. 2012; Singletary 2015). A payday loan is a short-term, high-cost loan, to be repaid on the borrower’s next payday (usually two weeks), in exchange for either a post-dated check, or electronic access to a borrower’s bank account. Payday loans are also labelled as “cash advances” or “check loans,” and the industry is often referred to under the heading of alternative financial services (AFS), which also includes check cashing services and auto title lending (Consumer Financial Protection Bureau 2016A). Providing easy access to a borrower’s account ensures that the loan will be paid off before any other bills. Many borrowers have also reported aggressive collection techniques related to providing the lender with direct bank account access. 4414520102298500Relationship to Poverty: According to a Pew Charitable Trust survey of payday loan borrowers, “respondents with household incomes less than $40,000 are three times as likely to have used payday lending” (Bourke et al. 2012). The federal poverty level in 2015 was set at $24,250 for a family of four, placing the average borrower not much above poverty levels (US Dept. of Health and Human Services 2015). These borrowers are the most likely to use payday loans for recurring expenses and to get trapped in an unmanageable cycle of debt.Typical Loan Use:Pew found that 69% of surveyed borrowers chose first to use a payday loan for recurring expenses. 53% of which were for “regular expenses” such as a utility bill, car payment, or credit card bill. Another 10% of those used the initial payday loan to cover rent or mortgage payments, and 5% for food expenses (Bourke et al. 2012). Only 16% of those surveyed chose a first payday loan for an unexpected or emergency expense (see Chart 1 below for the complete breakdown).43021256933565Chart 1: Pew Charitable Trusts 20120Chart 1: Pew Charitable Trusts 2012Effect of Loan Rollover on Low-Income Individuals: Rollovers have been identified as problematic in studies by the CFPB and CRL. The CFPB defines “sustained use” as 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” (Consumer Financial Protection Bureau 2013). A 2014 CFPB study found that four out of five payday loans are rolled over or renewed within 14 days (Burke et al. 2014). The CRL refers to this phenomenon as rollovers, renewal, or churn, and found that 75% of all payday loan volume is accounted for by churn, that is 59 million loans or $20 billion (Parrish and King 2009). Such high loan volumes, without the context of churn, would appear to indicate product demand, but instead indicate an unnecessary reliance among a small group of individuals, or what CRL dubs a “phantom demand.”33318451841500Policy Alternatives to Payday Lending: Alternatives can include state level policy restrictions. Thirteen states have already effectively prohibited payday lending through limits on the allowable APR. An APR cap of 36% effectively renders the industry unprofitable in the state. The industry does not seek to be competitive. Typically all lenders within a state will charge at the maximum allowable APR. The Pew Charitable Trust has also found that many people who used traditional payday lending will not shift to online payday lending in the absence of storefront locations because of the risks associated with identity theft, and what borrowers perceive as a lack of online lender accountability to any government or regulatory body (Bourke et al. 2012). Other policy limits on lenders include creating installment payment plans, rollover or cooling off periods, or “ability to repay” measures. These are similar to CFSA’s “industry best practices,” but Pew argues that lenders can easily evade these restrictions. For example lenders will front most costs at the beginning of the payment plan creating similarly unaffordable conditions for repayment. Policy preventing lenders from frontloading costs at the opening of the loan can help borrowers to meet initial payments and avoid re-borrowing. Relatively few borrowers will enter a plan despite the presence of the option. This may be because many payday lenders only relay this information in the fine print, which can be countered by a legislative provision for verbal presentation of the plan option. Other policy options include limiting payments to a percentage of a borrower’s income, such as the 5% limit suggested by Pew. Additionally other measures could include guarding borrowers from harmful repayment practices, such as abuse of the electronic payment system, and requiring concise disclosures of ALL fees (Bourke et al. 2013).Regulation of lenders offers another policy option. Requiring reporting and registration of lenders is a commonly employed state policy method. Many states have created database systems to keep track of lenders, but little is still known about the payday lending industry as a whole. This lack of knowledge is partially due to the power and organization of the industry. When regulations are made the industry generally finds loopholes. Policies can offer alternatives to payday loans through traditional institutions making credit available to low income populations. Traditional Financial Institutions, such as banks, can offer similar products, with state assistance if necessary. Some banks have already taken initiative to serve low-income communities; many offer alternatives to payday lending with lower APRs. Providing tax credits to banks for the number of accounts opened for low-income persons is one way to incentivize banks by making it profitable to work with lower income populations (Blank 2008)). Employers can also offer credit in conjunction with local nonprofits or credit unions, and payments can be deducted in small amounts from each paycheck.Policies can encourage better financial practices among low-income populations so that they can seek credit through lower cost traditional means when necessary, or have the money on hand to meet emergency expenses without payday lending. Policies can also encourage low-income families to begin or increase savings, which can act as a deterrent to using payday lending. Employer-based savings, or government-matched savings are positive incentives for low-income households to start saving.References: Blank, Rebecca. 2008. “Public Policies to Alter the Use of Alternative Financial Services Among Low-Income Households.” Brookings Institution. April 18. , Nick, Alex Horowitz, and Tara Roche. 2012. “Payday Lending in America: Who Borrows, Where they Borrow, and Why.” Pew Charitable Trusts. July 19. , Nick, Alex Horowitz, Walter Lake, and Tara Roche. 2013. “Payday Lending in America: Policy Solutions.” Pew Charitable Trusts. October 30. , Kathleen, Jonathan Lanning, Jesse Leary, and Jialan Wang. 2014. “CFPB Data Point: Payday Lending.” Consumer Financial Protection Bureau. March 1. Financial Protection Bureau. 2013. “Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings.” Last modified April 24. . Consumer Financial Protection Bureau. 2014. “CFPB Takes Action Against ACE Cash Express for Pushing Payday Borrowers into Cycle of Debt.” Last modified July 10. Financial Protection Bureau. 2016A. “What is a Payday Loan?” Last modified January 13. , Leslie and Uriah King. 2009. “Phantom Demand: Short-term Due Date Generates Need For Repeat Payday Loans, Accounting For 76% of Total Volume.” Center for Responsible Lending. July 9. research-analysis/phantom-demand-final.pdf.Pew Charitable Trusts. 2012. “A Short History of Payday Lending Law.” Last modified July 18. , Michelle. 2015. “The Vicious Cycle of Payday Loans.” Washington Post, March 28. . ................
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