Dennis Shaul: Defending Payday Loans with Data

By Dennis Shaul, CEO of the Community Financial Services Association of America

September 30, 2014

American Banker Bank Think

Anyone who has been following the news lately is likely under the misimpression that payday loans are on death’s doorstep — soon to be felled by a regulatory crackdown or drummed out of business due to plummeting popularity.

But a plethora of new studies and reports released by regulators and researchers tell a story that contradicts common criticisms of the payday lending industry. Moreover, millions of Americans rely on payday loans to meet their short-term credit needs. Those needs would not disappear if payday loans were eradicated.

The Consumer Financial Protection Bureau recently released an analysis of the complaints it has received directly from consumers in its first three years. The analysis revealed that roughly 1% of the consumer complaints are related to payday loans. This is dwarfed by the number of complaints related to mortgages, debt collection and credit cards, which make up more than two-thirds of the total complaint volume.

The CFPB’s data is not an outlier. It reflects the Federal Trade Commission’s complaint data from 2013, in which payday loans made up less than 1% of more than two million complaints collected.

Additional research from the CFPB suggests that annual percentage rates are a misleading way to measure the affordability of a short-term loan. The research looks at consumers' use of overdraft protection a short-term credit product that often serves as an alternative to payday loans. The report notes that an overdraft "loan" can have an APR of 17,000%. By comparison, a two-week payday loan for $100, with an additional cost of $15, has an implied APR of 391%. However, the real point is that neither of these annualized rates should be applicable to short-term transactions. Small-dollar loans for a short-term duration will always add up to a shockingly large APR, but this alone tells us little or nothing about their true cost or value.

Short-term borrowers also overwhelmingly prefer finance charges in simple dollar amounts as opposed to APRs, according to recent research by the Federal Reserve’s Thomas Durkin and Gregory Elliehausen. The overriding reason: using dollars makes it easier for people to make a quick judgment about how much a loan will cost and whether it is affordable. In short, it’s more practical.

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