Payday Lenders Raking in $3 Billion in Fees Every Year, Study Finds

CRL report calls on policymakers to cap interest rates for short-term loans.  

With federal efforts to rein in predatory lenders stalled, payday and car title lenders extract almost $3 billion in fees each year from states without strong consumer protection laws, the Center for Responsible Lending said in a report issued this month.

“The scale of this wealth extraction is troubling, with much of the $3 billion flowing through storefronts positioned in low-wealth communities,” said Charla Rios, deputy director of research for CRL. “They are set up to systematically draw borrowers into the long-term cycle that underpins the predatory lending business model.”

She added that the $3 billion figure is low, since many lenders do not report activity to state officials.

Recommendations

CRL called on policymakers to cap interest rates for short-term loans at 36%, the same threshold used in the Military Lending Act, which governs loans to servicemembers. The NCUA caps short-term loan interest rates at 28% at credit unions. The agency has also developed two Payday Alternative Loan models for institutions to use, but it is unclear how many credit unions offer the loans.

Backstory and Context

The CFPB, under the leadership of Richard Cordray, issued a strict payday lending rule that included a provision stating that borrowers must demonstrate an ability to pay before a loan is made. However, Kathleen Kraninger, the Trump Administration’s CFPB director, rejected the ability-to-pay provision.

Under current director Rohit Chopra, the bureau has taken action against individual payday lenders for violations of consumer protection laws.

Additional Findings

Some states have limited payday lending, according to the CRL study, which found that 19 states and the District of Columbia currently have rate caps of 36% or less on payday loans.

However, many states still allow loans carrying annual interest rates averaging more than 300%.

“By charging exorbitant fees without assessing the borrower’s ability to meet the terms and repay the loan, payday and car-title loans leave consumers susceptible to a cascade of adverse financial consequences, such as difficulty covering living expenses, increased overdraft fees, delinquency on other bills, involuntary loss of bank accounts, wage garnishment, and even bankruptcy,” the report reads. “For car-title loans, the end result is too often the repossession of the borrower’s car—with one in five car-title loan sequences ending in vehicle repossession.”

But some payday lenders have stopped offering such loans, CRL noted. For instance, the payday lending company Check ‘n Go no longer operates storefronts in several states. And TMX Finance has closed operations in three states that have passed rate caps that effectively prohibit car-title lending.