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Nearly half the people who take out payday loans extend them so many times that they end up paying more in fees and finance charges than the amount they initially borrowed.
That’s according to a new report out today from the Consumer Financial Protection Bureau. The report focuses on repeated borrowing by consumers who take out cash to get them from paycheck to paycheck, but end up mired in a debt spiral that can last for years.
Just a reminder that payday loans are those cash advances, sometimes called ‘check loans,’ in which someone writes a check dated for payday and gives it to the lender. The person gets their money, less the interest, and the lender cashes the check when payday comes — or charges the borrower a fee to extend the loan.
Consumer Financial Protection Bureau head Richard Cordray joins Here & Now’s Jeremy Hobson to discuss the report.
JEREMY HOBSON, HOST:
This is HERE AND NOW from NPR and WBUR Boston. I'm Jeremy Hobson.
And there's a report out today from the Consumer Financial Protection Bureau. It finds nearly half the people who take out payday loans extend them so many times that they end up paying more in fees than the amount they initially borrowed. Quick reminder: Payday loans are those short-term cash advances, they're sometimes called check loans, where the borrower either pays back the money when he gets paid or extends by a few weeks by paying interest and a fee, and the interest rate can be 500 percent or more. Richard Cordray is head of the CFPB. He joins us from Nashville. Welcome.
RICHARD CORDRAY: Glad to be here.
HOBSON: Well, we've heard for years that payday loans can be dangerous for the borrowers. What do you think is new in this report?
CORDRAY: So this is a study that's quite comprehensive. It looked at over 12 million loans made over a 12-month period. And there are two notable findings in the study. The first is that four out of five payday loans are either rolled over or renewed within two weeks. Even in states that have a cooling-off period for renewals of 14 days, the loans get renewed just as soon as people can take them out again.
And the other fact that sticks out from this report is that more than half of the loans that payday lenders make are made to people who are stuck in a cycle that lasts seven or more loans in a row, which means that those people are paying more in fees than the original amount they've borrowed on their loan.
HOBSON: Well, so what can the bureau do about this? Is there anything that you can do to fix this problem?
CORDRAY: Yeah. We're able to use several different tools to address problems in the payday lending industry. First of all, we are able to supervise - that is, go in and send examination teams to examine payday lenders for compliance with the law. That's a new authority at the federal level, and it's one that we've been using now for the past two years. More importantly perhaps, we have the ability to write new regulations that will govern the payday lending industry.
Third, we have the ability to enforce the law if payday lenders are breaking the law. And we've already had a couple of enforcement actions for millions of dollars, including one where we had to add a fine for obstructing our investigation.
HOBSON: Well, what about new regulations? You mentioned that. What kind of a regulation would you like to see?
CORDRAY: I think we need to look at whether we can find limitations on these loans that help avoid people being stuck in the cycle of debt, and that there be more attention paid to who the loans are going to and what their ability to repay the loan is. We have many people across the country taking out payday loans that are advertised as you're able to get in and out easily. And for many of them we're finding it's not easy at all.
HOBSON: But can you put limitations on it without simply getting rid of the industry?
CORDRAY: We think that that's doable. What we have said is we recognize that among the American public there is a demand for small-dollar credit. It's a demand that has not been met all that well. This high-cost product is one way to meet the demand, but it has its own problems. It carries its own problems in terms of miring people in a cycle of debt. At the same time, our study does show there are some people who are able to get in and out of these loans, meet their emergency needs.
So we don't want to cut off all of this credit. We recognize there's a need to access small-dollar credit. But we want it to be accessed with products that are going to be helpful to consumers and not harmful to them.
HOBSON: Where does this fall on your priority list as the head of a new agency?
CORDRAY: So our initial priorities, which were set by Congress, had to do with the mortgage market. You know, the mortgage market was what really created the financial crisis five years ago, and the irregularities there needed to be addressed. We're now turning to some other issues such as payday lending. This is one of our short-term priorities over the course of this next year.
HOBSON: Richard Cordray, the head of the Consumer Financial Protection Bureau, the CFPB. Thanks so much for talking with us.
CORDRAY: My pleasure.
HOBSON: And you're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.