Although credit union short-term, small-amount payday loan alternatives were not included in the report, the CFPB said it is also researching them and will publish results in an “overdraft study” in the next couple of months.
The CFPB hasn’t clearly stated it intends to write new rules for payday lending products, but Director Richard Cordray said during a press call that “the purpose of all our outreach, research, and analysis on these issues is to help us figure out the right approach to protect consumers and ensure that they will have access to a small loan market that is fair, transparent, and competitive.”
As for deposit advance loans offered by depository institutions, the report said they are generally similar to storefront payday loans “in structure, purpose, and the consumer protections concerns they raise.”
The CFPB was particularly critical of the requirement that borrowers repay the full amount in a balloon payment or give lenders access to direct deposit amounts or deposit accounts.
Access to deposits decreases risk and relaxes underwriting requirements, but the report criticized lenders for not taking a borrower's ability to repay the loan outside of other debts and ordinary living expenses into consideration.
The report said deposit advance product fees are generally about $10 for every $100 borrowed, an amount that would equate to 304% for $100 borrowed for a 12-day term.
Deposit advance products also lead to sustained use, the CFPB said. More than half of all users surveyed borrowed more than $3,000 per year, and 14% borrowed more than $9,000 annually. These borrowers typically have an outstanding balance at least nine months of the year and typically are indebted more than 40% of the year.
In a nod to courtesy pay products, the report criticized lenders who market payday alternatives as a way to avoid overdraft fees, saying 65% of deposit advance borrowers incur such fees anyway. In fact, the report said, the heaviest deposit advance borrowers produce the most overdraft revenue for lenders.