Payday Loans Explained
In the decade ending in 2014, the number of payday-loan businesses licensed in Idaho changed little, from a low of 204 in 2004 to a high of 224 in 2009.
That changed last year. The Idaho Department of Finance, which licenses and regulates the lenders, said the tally fell from 223 to 147. That could be an indicator of an industry on the decline.
The department attributes the drop to increased scrutiny of the industry and new federal regulations that have not yet been formally proposed.
Those regulations are expected to require lenders to make sure borrowers can repay their loans, to limit such loans to 45 days, and to establish a 60-day “cooling off” period after a borrower has taken out three loans in a row. The rules are being drafted by the Consumer Financial Protection Bureau, or CFPB, created under the Dodd-Frank Wall Street reform act of 2010.
“The bureau is particularly concerned that lenders are offering these products without assessing the consumer’s ability to repay, thereby forcing consumers to choose between reborrowing, defaulting, or falling behind on other obligations,” CFPB spokesman David Mayorga told the Statesman. “We are also concerned about certain payment collection practices that can subject consumers to substantial fees and increase risk of account closure.”
Most borrowers struggle to pay off loans and could end up in debt for months. According to the CFPB, most payday loans have finance charges of $15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an annual percentage rate ranging from 391 percent to 521 percent. Idaho does not cap the loan rates.
A Pew Charitable Trusts project on payday lending and small-dollar loans study found, “These loans are advertised as quick fixes for unexpected expenses, but repaying them consumes more than a third of an average borrower’s paycheck, leading to repeated borrowing for an average of about half the year.”
The new rules will also affect title loan businesses. They hold vehicle titles as collateral for short-term loans. The number of these in Idaho also fell last year, to 75 from 85.
JUST CAN’T AFFORD IT
Idaho does not ask why payday or title lenders do not renew licenses, Consumer Finance Bureau Chief Mike Larsen said.
“What we are hearing and reading nationally is the lenders are saying they cannot afford to stay in the business,” Larsen said.
The Statesman asked more than a dozen national and local payday-loan companies why they closed some or all of their Idaho stores. They either did not return calls or would not comment. The industry’s trade association, the Community Financial Services Association, also did not return calls. And a CFPB spokesman declined to comment when asked whether the proposed rules could have caused Idaho lenders to close.
Neighboring Utah, which has terms and limits comparable to Idaho’s, said it also saw a decline in payday lenders last year, though only a tiny one, from 68 in 2014 to 63 in 2015.
“They know the future is going to be more restrictive,” said Paul Cline of the Utah Department of Financial Institutions.
In July, citing an “increasingly challenging legislative and regulatory environment,” Texas-based EZCorp Inc. closed all of its 480 payday, auto title and installment-loan stores in the U.S., including 20 EZMoney stores in Idaho.
In Idaho last year, 10 other payday lending companies closed shop altogether. Three companies closed some of their branches.
Of the 69 storefronts that closed, all but seven were owned by national chains.
NEW SHERIFF IN TOWN
Until now, payday-loan regulation has largely been left to states. Congress stepped in to curb abuses.
A 2014 CFPB study found that four out of five payday loans are rolled over or renewed within two weeks, and that roughly half of all loans are made to borrowers in sequences of 10 or more in a row.
“From this finding, one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term,” CFPB Director Richard Cordray said in a hearing on the report’s findings.
The CFPB announced in March 2015 that it was considering proposals “to end payday debt traps” that would cover payday and title loans, certain high-cost installment loans and open-end loans.
But it will not ban payday loans or cap their interest rates. Dodd-Frank did not give the CFPB that authority.
The industry says the CFPB’s proposed rules could force up to 70 percent of payday lenders out of business and leave millions of consumers without access to credit.
A Charles River Associates May 2015 report found that the CFPB’s proposal for short-term lending would cut small payday lenders’ revenues by 82 percent on average.
The industry is waiting to see what the agency will do.
“We expect to release the rulemaking proposal in first quarter 2016,” Mayorga said. It is too early to say when the rules might take effect, he said.
Idaho is one of 27 states that allows payday loans with an annual percentage rate of 391 percent or higher, according to a 2012 Pew study. Idaho payday lenders charged an average 582 percent annual interest on their loans — the highest in the nation, according to the report.
Fifteen states do not allow payday lending. Eight allow payday lending with tighter requirements, such as lower limits on fees or longer repayment periods.
“There are repeated discussions around the country about capping payday loans at 36 percent APR,” Larsen said.
With a 36 percent annual percentage rate, the lender of a $100 two-week loan would earn $1.38 in finance charges, hardly worth the while to continue doing business, Larsen said.
The Pew report found that in the states “that prohibit payday lending or interest rates higher than 36 percent, there are no payday lending stores.”
A bill passed by the Legislature in 2014 law set limits on payday lending, though not interest rates. Its first full calendar year as law was 2015. But Larsen said he has not heard that the law could be the reason so many payday lenders left Idaho that year.
The law was backed by the industry. It requires payday lenders to limit loans to 25 percent of a borrower’s monthly income. It allows borrowers who cannot pay within the usual two-week term to pay their debt in four payments over two months without additional fees. It also caps the number of times a lender can try to redeem a bounced check at two.
THE INDUSTRY’S CASE FOR SURVIVAL
More than 20,000 payday loan stores operate across the U.S., making $38.5 billion in loans annually to borrowers in 19 million households, according to the Community Financial Services Association.
At a Feb. 11 congressional hearing, Dennis Shaul, the association’s director, said the Federal Deposit Insurance Corp. estimates that 51 million Americans, or 20 percent of all households, are not served by traditional banking products.
“As many as 76 percent of Americans are living paycheck to paycheck without resources to cover unexpected expenses or disruptions in income,” Shaul told a House subcommittee. “Small-dollar, short-term loans of the type our members provide are an essential option for these households — one option among several, which may include incurring late fees, bouncing checks, or allowing services to be canceled and reconnected at a later date. Compared to these alternatives, payday loans are often not only the most convenient but also the least expensive option.”
Shaul said a Federal Reserve study showed that bans in Georgia and North Carolina resulted in more returned checks, bankruptcy filings and complaints to the Federal Trade Commission about collection practices.
“Consumers who do not have access to payday loans turn to costlier sources of credit and often to the Internet, where lending may be entirely unregulated,” Shaul said.
Idaho’s Larsen agrees.
“Lawmakers can regulate the supply of, but not the demand for, short-term small-dollar consumer loans,” he said.
By the numbers
Amount of payday loans extended
Number of loans
Average loan amount
Average finance charge for a $100 payday loan for a 14-day period
Source: Idaho Department of Finance
How a payday loan works
A payday loan is a cash advance secured by a personal or electronic check.
Say you need to borrow $100 for two weeks. The fee is $20. You write a check for $120 payable to the lender, who agrees to hold the check until your next payday. When that day arrives, the lender either deposits the check or you renew the loan for two more weeks and pay an additional $20 fee.
The cost of the initial loan is a $20 finance charge, which works out to an annual percentage rate of 521 percent. If you renew the loan three times — the maximum number of renewals allowed under Idaho law — the finance charge would climb to $80.
Payday loan limits in Idaho
▪ Are limited to 25 percent of a borrower’s gross monthly income, or $1,000.
▪ Have no fee cap, but fees costs must be posted, showing dollar amount as a cost per $100.
▪ Cannot be backed by cars or property as collateral.
▪ Cannot be renewed more than three times in a row.
▪ Are subject to borrowers having a full business day to change their minds and rescind the loan.
▪ Must have the option of a 60-day extended payment plan with four equal payments once per 12-month period when requested by the borrower before the payday loan is in default.
▪ Cannot be subjected to more than two bounced-check charges.
▪ Must be made by state-licensed lenders. A payday loan in violation of licensing requirements is void, uncollectable and unenforceable.
Nearly 70 stores close in 2015
National chains ACE Cash Express, Check Tech, EZMoney and RFG closed all of their Idaho branches. FastBucks, QC Financial and Title Cash closed some branches.
Locally owned stores that closed include Advance Check Loans in Nampa and Caldwell; Easy Money Xpress, Kuna; Check N Loan, Idaho Falls; Minuteman Cash, Burley; and Payday Loans, Buhl.
Source: Idaho Department of Finance