The Cumulative Costs of Predatory Practices

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Debt-Trap Lending Car-Title Loans Car-title loans are expensive loans averaging more than $1,000 that are secured by the title to a vehicle that the borrower owns free-and-clear. They are traditionally offered as payday-loan-like single-payment loans with one-month terms, which tend to be renewed multiple times like their payday counterparts. An emerging practice is a movement toward longer-term and still high-cost installment products. The very structure of car-title loans leads to problems for consumers, including excessive repayment fees and repossessions. Car-title loans use the car—an essential asset for most families—as collateral and generally require full repayment within a month. Borrowers typically cannot afford to repay these loans and pay their regular living expenses, so they typically take out loan after loan, re-paying the substantial fee to re-borrow the principal. The threat of repossession, which can put in danger borrowers’ ability to get to work and earn a living, means that they prioritize paying the loans, even if they cannot afford them. The typical car-title borrower takes out nine one-month loans per year at 300% APR, paying $2,349 in fees alone for a loan of only $1,042. The national car-title market is large: CRL estimates that there are over 8,100 stores that originate 2 billion loans per year, with borrowers paying $4.3 billion in fees. Policy Recommendations: • States and Congress should limit the APR on car-title loans to 36%. • CFPB, which is poised to promulgate rules addressing the car-title lending debt trap, should require lenders to determine the borrower’s ability to repay the loan without re-borrowing, including consideration of income and expenses. • States that continue to authorize car-title lending should require that loans be structured as installment products with amortizing equal monthly payments, full consideration of the borrower’s ability to repay the loan and afford other expenses, and reasonable rate limitations. • States should vigorously enforce their laws and work in partnership with federal regulators to address attempts at subterfuge. • Federal regulators—including the Department of Justice, FTC, and CFPB—should use their enforcement authority to address violations of law. • Borrowers in default should receive consumer protections, including notice prior to repossession or sale of the vehicle, a right to redeem the vehicle, and a ban on deficiency balances (in which the borrower owes fees to the lender if the sale of their car does not cover the outstanding debt owed). In addition, the sale of repossessed vehicles should be required to be commercial reasonable, with any surplus returned to the borrower. Overdraft Loans Overdraft fees cost consumers approximately $16.7 billion every year. Overdraft loans originally started a courtesy extension of credit to consumers for shortfalls in their checking accounts, but they have since turned into a revenue-creating machine for banks. The median overdraft fee is $35, and the median size of the triggering transaction is under $20, which results in a very high-interest, very short-term loan. 42 The State of Lending in America & its Impact on U.S. Households
Public pressure and lawsuits have led some of the biggest banks to stop some egregious practices, such as reordering transactions to maximize overdraft fees. Some banks have chosen to stop charging overdraft fees on some transactions, including debit card transactions, and several have introduced accounts without overdraft fees at all. The rise of “extended overdraft” fees, however, marks a trend in the opposite direction. Policy Recommendations: • Prohibit overdraft fees on debit card and ATM transactions, which financial institutions can easily decline at no cost to the consumer. • Prohibit overdraft fees on prepaid cards. • Assess the implications of the increasing percentage of overdraft fees triggered by electronic transactions, including one-time ACH transactions that are substantively indistinguishable from one-time debit card purchases. • Prohibit manipulation of transaction posting order to increase fees. • Limit the number of overdraft fees, including “extended” overdraft fees, that financial institutions can charge customers. • Require that overdraft fees be reasonable and proportional to the underlying transaction and to the cost to the bank of covering the overdraft. • Require that the costs of overdrafts be disclosed as an annual percentage rate. Bank Payday Loans Up until recently, some banks made direct payday loans to their checking account customers. These loans came with average APRs between 225% and 300%, and they created a cycle of debt that ensnared borrowers into repeat borrowing. In 2014, however, FDIC and OCC put in place guidance that required strong consumer protections for these loans. As a result, all banks are now backing away from these loans and ceasing this portion of their business, although one bank has introduced a new product that is lower-cost but still problematic. Still, the FDIC/OCC guidance represented a huge victory for consumers, especially financially vulnerable borrowers and their families. Policy Recommendations: • The Federal Reserve Board should issue supervisory guidance addressing bank payday loans that clarifies appropriate underwriting procedures, limits the number of loans, and requires that fees be reasonable. • CPFB should use its authority to ensure lenders are not trapping borrowers in a cycle of payday loans. It should also make improvements to existing consumer regulations, including the APR disclosure under the Truth in Lending Act, and protections against mandatory automatic repayment under the Electronic Funds Transfer Act. Center for Responsible Lending 43
Page 1: ? The Cumulative Costs of Predatory
Page 4 and 5: Foreword By Michael Calhoun, Presid
Page 6 and 7: Executive Summary In this final cha
Page 8 and 9: Lending Abuses and Their Costs Cons
Page 10 and 11: Costs to Borrowers The most obvious
Page 12 and 13: Costs Resulting from Default Loans
Page 14 and 15: Figure 4 illustrates the dollar imp
Page 16 and 17: Spillover Costs Borrowers are not t
Page 18 and 19: Lending abuses by one firm can also
Page 20 and 21: Student Lending The amount of outst
Page 22 and 23: Who Pays Consumer debt is widesprea
Page 24 and 25: Figure 11: Non-white borrowers rece
Page 26 and 27: Loan Stacking Although some consume
Page 28 and 29: Cash-out Mortgage Refinances for De
Page 30 and 31: A Role for Regulation With the cost
Page 32 and 33: Figure 16: Default Rates for QM-Lik
Page 34 and 35: Conclusion As we have identified th
Page 36 and 37: Consumer Financial Protection Burea
Page 38 and 39: Quercia, R., Ding, L., & Reid, C. (
Page 40 and 41: Auto Loans For many American famili
Page 44 and 45: Payday Loans Payday loans are marke
Page 46 and 47: States should: • Require more det
Page 48 and 49: Notes 48 The State of Lending in Am
Page 50: About the Center for Responsible Le

The Cumulative Costs of Predatory Practices

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