Payday Loans and Deposit Advance Products

APRIL 24, 2013

Payday Loans and Deposit Advance

Products

A WHITE PAPER OF INITIAL DATA FINDINGS

CONSUMER FINANCIAL PROTECTION BUREAU

Table of Contents

1. Introduction¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.3

2. Overview of Payday Loans and Deposit Advances¡­¡­¡­¡­¡­¡­.6

2.1 Payday Loans¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­8

2.2 Deposit Advances¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...11

3. Initial Data Findings¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­14

3.1 Payday Loans¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...14

3.1.1. Loan Characteristics¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­..15

3.1.2 Borrower Income¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.17

3.1.3. Intensity of Use¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...20

3.1.4. Sustained Use¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.24

3.2 Deposit Advances¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­26

3.2.1 Loan Characteristics¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...27

3.2.2. Consumer Account Characteristics¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.28

3.2.3. Intensity of Use¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­...32

3.2.4. Sustained Use¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.38

3.2.5. Deposit Advance Use and Overdraft/NSF Activity¡­.¡­..¡­40

4. Conclusion and Implications¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­..43

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CONSUMER FINANCIAL PROTECTION BUREAU

1. Introduction

During the past year, the Consumer Financial Protection Bureau (CFPB) has engaged in an indepth review of short-term small dollar loans, specifically payday loans extended by nondepository institutions and deposit advance products offered by a small, but growing, number of

depository institutions to their deposit account customers. This review began with a field

hearing held in Birmingham, Alabama in January 2012. At that event, CFPB Director Richard

Cordray noted that ¡°the purpose of th[e] field hearing, and the purpose of all our research and

analysis and outreach on these issues, is to help us figure out how to determine the right

approach to protect consumers and ensure that they have access to a small loan market that is

fair, transparent, and competitive.¡± Director Cordray went on to state that ¡°[t]hrough forums

like this and through our supervision program, we will systematically gather data to get a

complete picture of the payday market and its impact on consumers,¡± including how consumers

¡°are affected by long-term use of these products.¡± 1

Both at the field hearing and in response to a subsequent request for information, the CFPB

heard from consumers who use these products. 2 On one hand, some consumers provided

favorable responses about the speed at which these loans are given, the availability of these

loans for some consumers who may not qualify for other credit products, and consumers¡¯ ability

to use these loans as a way to avoid overdrawing a deposit account or paying a bill late. On the

other hand, consumers raised concerns such as the risk of being unable to repay the loan while

still having enough money left over for other expenses, the high cost of the loan, and aggressive

debt collection practices in the case of delinquency or default.

These discussions and submissions underscore the importance of undertaking a data-driven

analysis of the use of these products and the longer-term outcomes that borrowers experience.

Because Congress authorized the CFPB to supervise both depository and non-depository

institutions, over the past year we have been able to obtain data from a number of market

The full transcript of Director Cordray¡¯s speech is available at .

1

2 Comments received in response to this request for information are available for review at

.

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CONSUMER FINANCIAL PROTECTION BUREAU

participants that offer either deposit advance products or payday loans. At the same time, the

CFPB has been conducting an in-depth review of overdraft products and practices, which some

consumers may also use to meet financial shortfalls. The CFPB plans to issue a preliminary

report based on the results of that study shortly.

This white paper summarizes the initial findings of the CFPB¡¯s analysis of payday loans and

deposit advances. It describes the features of typical payday loan and deposit advance products.

The paper then presents initial findings using supervisory data the CFPB has obtained from a

number of institutions that provide these products. 3 The analysis reported here reflects

considerations needed to preserve the confidentiality of the institutions that provided the

information used in this paper.

The CFPB has a statutory obligation to promote markets that are fair, transparent, and

competitive. Consequently, this white paper has two primary purposes. First, we seek to provide

information that may facilitate discussion of policy issues around a shared set of facts. Second,

we seek to provide market participants with a clear statement of the concerns our analysis

raises.

The CFPB recognizes that demand exists for small dollar credit products. These types of credit

products can be helpful for consumers if they are structured to facilitate successful repayment

without the need to repeatedly borrow at a high cost. However, if the cost and structure of a

particular loan make it difficult for the consumer to repay, this type of product may further

impair the consumer¡¯s finances. A primary focus is on what we term ¡°sustained use¡±¡ªthe longterm 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. 4

The CFPB considers all supervisory information to be confidential. Consistent with CFPB¡¯s rules, the data findings

presented in the white paper do not directly or indirectly identify the institutions or consumers involved. See CFPB¡¯s

final rule on the Disclosure of Records and Information, 12 C.F.R. ¡ì 1070.41(c).

3

For purposes of this white paper, sustained use is not measured only by the number of loans that are taken by a

consumer over a certain period of time, but the extent to which loans are taken on a consecutive or largely

uninterrupted basis. For example, one consumer who takes out six loans in a year may do so on a sporadic basis,

paying back each loan when due, and taking significant breaks between each use. Another consumer might also have

taken out six loans, but sequentially with little or no break between periods of indebtedness. The latter scenario would

be more indicative of sustained use than the former.

4

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CONSUMER FINANCIAL PROTECTION BUREAU

The findings reported in this white paper indicate that these risks exist for a sizable segment of

consumers who use these products.

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