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Prepared Remarks of CFPB Director Richard Cordray on Payday Lending Research Report Press Call

April 20th, 2016 by

Prepared Remarks of CFPB Director Richard Cordray on Payday Lending Research Report Press Call

BY RICHARD CORDRAY

Director, Richard Cordray

Thank you for joining us. From the beginning, the small-dollar lending market, which includes payday loans, has been an area of focus for us at the Consumer Financial Protection Bureau. We have engaged in intensive analysis of the market. We have considered the history of the demand for such loans and the conditions that create such demand. And we have focused carefully on how people are affected by the kinds of credit products that have evolved to meet this demand.

In our deep analysis of this product, we have put out two research reports to date. Today, we are adding to that body of knowledge with another research paper about payday loans and certain installment loans, specifically looking at online lenders.

After analyzing 18 months of data on more than 330 online lenders, we have found that borrowers face steep, hidden costs to their online loans in the form of unanticipated bank penalty fees.

Online lenders often use an automated network to deposit the loan amount into a borrower’s bank or credit union account. They also collect their payments through those same automated networks by submitting payment requests. This easy means of collection means they have considerable power over a consumer’s bank account.

While traditional payday loans require a one-time payment within a relatively short period of time after the consumer obtains the loan, online payday loans take different forms. Some require a single payment. Some require a series of interest-only payments and a final balloon payment covering the entire principal amount. Some are repaid in installments with each payment scheduled to coincide with the consumer’s payday.

If the consumer does not have enough money in her account, then her bank or credit union can choose to make the payment on her behalf or it can choose to deny the request. Either way, this often means additional penalty charges will be imposed. The bank or credit union can either make the payment and impose an overdraft charge or refuse the payment and assess a non-sufficient funds (known as an NSF) charge. During the time period covered in the report, the median fee in both instances was about $34. If the bank or credit union declines the payment, the charge is levied in addition to any penalties the payday lender itself may charge for the failed payment.

If a payment request fails, lenders often follow up by making repeated attempts to extract payments from the account, with each one potentially resulting in more fees. Other lenders may react by splitting a single payment into multiple smaller payment requests and pushing them through on the same day, in the hopes of collecting at least some of the money. They can do this, for example, by making three $100 attempts on a day the consumer is due to repay $300. In one extreme case, we saw a lender that made 11 payment requests on an account in a single day.

Failed debits can end up costing consumers a lot of money. Our first finding from today’s study is that though many payment requests are fulfilled, about half of online borrowers have at least one that overdrafts or fails. These consumers are incurring an average of $185 in bank penalties. That is on top of any penalties the lender imposes, as well as the average annualized interest rate of 300 to 500 percent that is routinely charged on these kinds of loans.

A second finding of today’s research paper is that many online borrowers hit with an overdraft or NSF fee end up losing their checking or savings accounts altogether. Banks or credit unions can close a consumer’s account for various reasons, including having a negative balance for too long. We found that over the study period, 36 percent of accounts with a failed debit attempt from an online lender ended up being closed by the bank or credit union. This usually happened within 90 days of the initial failed payment. Getting booted from the banking system can have far-reaching repercussions for consumers, leading to a downward spiral that costs them even more money and their precious time. It can be hard to get a new account at another bank. It can mean having to use expensive check-cashing and bill-paying services to cash their paychecks or their benefits checks or to pay their bills, services they used to take for granted.

A third key finding today is that 70 percent of second payment requests fail to collect any money and later attempts are even less likely to succeed. While it may cost the lender next to nothing to try to extract money from a consumer’s account, it can cost the consumer serious money. What our study found is that after one failed payment request, lenders try again three-quarters of the time. This is true despite the fact that so few of them succeed. If they keep at it, a third or subsequent attempt will fail at an even higher rate. Lenders may keep on dinging a consumer’s account over and over again, with each ding costing the consumer a hefty bank fee.

As the Consumer Bureau has said all along, we believe that many people who live paycheck to paycheck need access to credit that can help them manage their financial affairs. But we also believe that consumers deserve to have access to responsible credit that helps them rather than harms them.

Each of these additional consequences of an online loan can be significant, and together they may impose large costs, both tangible and intangible, that go far beyond the amounts paid solely to the original lender. So the true costs of these loans, taken in the aggregate, must be kept in mind as we assess the effects on consumers, especially those who were already experiencing financial difficulties when they took out the loan in the first place.

Last year, we began the process of reforming the market for small-dollar loans. We shared our initial framework for a proposed rule with a small business review panel and with the public. It included an idea for providing new consumer protections about when and how lenders are able to access and control the money in consumer accounts. The research paper we are publishing today sheds further light on these practices to help us better formulate needed reforms in this market.

Of course, lenders that are owed money are entitled to get paid back. But we do not want lenders to be abusing their preferential access to people’s accounts. Borrowers should not have to bear the unexpected burdens of being hit repeatedly with steep, hidden penalty fees that are tacked on to the costs of their existing loans. Yet today’s report shows that this is just what is happening to many consumers. We will consider this data further as we continue to prepare new regulations to address issues with small-dollar lending.

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

CFPB Finds Half of Online Payday Borrowers Rack Up an Average of $185.00 in Bank Penalties

April 20th, 2016 by

CFPB Finds Half of Online Payday Borrowers Rack Up an Average of $185.00 in Bank Penalties

Repeat Debit Attempts Add Steep, Hidden Cost for Payday Borrowers Yet Typically Fail to Recover Payments

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) issued a report that found that attempts by online lenders to debit payments from a consumer’s checking account add a steep, hidden cost to online payday loans.

Half of online borrowers rack up an average of $185 in bank penalties because at least one debit attempt overdrafts or fails. And one third of those borrowers who get hit with a bank penalty wind up having their account closed involuntarily. The study also found that despite this high cost to consumers, lenders’ repeated debit attempts typically fail to collect payments.

“Taking out an online payday loan can result in collateral damage to a consumer’s bank account,” said CFPB Director Richard Cordray. “Bank penalty fees and account closures are a significant and hidden cost to these products. We are carefully considering this information as we continue to prepare new regulations in this market.”

The report is at: http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf

Payday loans are typically marketed as a way to bridge a cash flow shortage between paychecks or other income. Also known as “cash advances” or “check loans,” they are usually high-cost loans that can offer quick access to money. Payment is usually due in full on the borrower’s next payday, although some lenders offer installment loans or longer-term loans with payments typically timed to coincide with the consumer’s next payday.

Today’s report is based on data from an 18-month period in 2011 and 2012 that looked at online payday and certain online installment loans made by more than 330 lenders. It is a continuation of the CFPB’s reports on payday loans and deposit advance products, some of the most comprehensive studies ever undertaken on the market. Previous reports have raised questions about the lending standards and loan structures that may contribute to the sustained use of these products.

Today’s report examines the ways that online lenders attempt to recover their money by debiting a consumer’s checking account. Online lenders often use an automated network to deposit the loan proceeds into borrowers’ checking accounts. They collect money by submitting a payment request to the borrower’s depository institution through the same system. Borrowers facing financial difficulties are often hit by multiple, costly debit attempts. If a debit attempt fails, lenders often follow up with repeated attempts against a consumer’s account. Many lenders also split a single payment into multiple smaller debits in the hopes that the consumer’s account will contain enough money to fulfill one of the attempts. They can do this, for example, by submitting three $100 requests on a day the borrower is due to pay $300.

When an account lacks sufficient funds, the bank or credit union may fulfill the debit and charge the consumer an overdraft fee or the debit attempt could fail and the bank or credit union will reject the payment request and charge a non-sufficient funds fee. The typical fee for both overdraft and non-sufficient funds was $34 in 2012. If the debit attempt is rejected, the lender may also charge the borrower a late fee, a returned payment fee, or both. Negative account balances are a significant contributor to involuntary account closures at many banks and credit unions.

Today’s study found that bank penalty fees and account closures are a significant, hidden cost of online payday and payday installment loans. The study further found that some lenders repeatedly submit payment requests to consumer accounts even though debit attempts typically do not generate more income. Specifically, the report found:

  • Half of online borrowers are charged an average of $185 in bank penalties: One half of online borrowers have at least one debit attempt that overdrafts or fails. These borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts.
  • One third of online borrowers hit with a bank penalty wind up losing their account: A bank account may be closed by the depository institution for reasons such as having a negative balance for an extended period of time or racking up too many penalty fees. Over the 18-month period covered by the data, 36 percent of accounts with a failed debit attempt from an online lender ended up being closed by the depository institution. This happened usually within 90 days of the first non-sufficient funds transaction.
  • Repeated debit attempts typically fail to collect money from the consumer: After a failed debit attempt, three quarters of the time online lenders will make an additional attempt. Seventy percent of second payment requests to the same consumer’s account fail. Seventy-three percent of third payment requests fail. And, each repeated attempt after that is even less likely to succeed.

Today’s report will help educate regulators and the public about how the payday and installment lending markets work and about the behavior of borrowers in the market. The CFPB has authority over the payday loan and payday installment loan markets. It began its supervision of payday lenders in January 2012. In November 2013, the CFPB began accepting complaints from borrowers encountering problems with payday loans. Last month, it began accepting complaints about online marketplace lenders.

Last year the Bureau announced it was considering a proposal that would prohibit payday lenders and similar lenders from making more than two unsuccessful attempts in succession on a borrower’s checking or savings account. The Bureau is expecting to issue a proposed rule later this spring.

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov

Q1 2016 Foreclosure Activity Below Pre-Recession Levels in 36 Percent of U.S. Housing Markets

April 18th, 2016 by

IRVINE, Calif. – April 14, 2016 — RealtyTrac® (www.realtytrac.com), the nation’s leading source for comprehensive housing data, today released its Q1 and March 2016 U.S. Foreclosure Market Report™, which shows first quarter foreclosure activity was below pre-recession levels in 78 out of 216 U.S. metropolitan statistical areas (36 percent) analyzed in the report.

Maryland, New Jersey, Nevada post highest state foreclosure rates in Q1 2016

One in every 459 U.S. housing units had a foreclosure filing in the first quarter of 2016. States with the top five highest rates were Maryland (one in every 194 housing units with a foreclosure filing);

New Jersey (one in every 216 housing units); Nevada (one in every 236 housing units); Delaware (one in every 240 housing units); and Florida (one in every 274 housing units.

Atlantic City, Trenton, Baltimore post highest metro foreclosure rates in Q1 2016

Among the 216 metropolitan statistical areas with a population of at least 200,000, those with the five highest foreclosure rates in the first quarter of 2016 were Atlantic City, New Jersey (one in every 106 housing units with a foreclosure filing); Trenton, New Jersey (one in every 168 housing units); Baltimore, Maryland (one in every 183 housing units); Lakeland-Winter Haven, Florida (one in every 196 housing units); and Rockford, Illinois (one in every 211 housing units).

Average time to foreclose decreases for second consecutive quarter

Properties foreclosed on during the first quarter of 2016 were in the process an average of 625 days, down 1 percent from 629 days in the previous quarter, but still up 1 percent from 620 days in the first quarter of 2015. The 1 percent quarter-over-quarter decline in the average time to foreclose in Q1 2016 was the second consecutive quarterly decline nationwide.

There were six states with an average time to foreclose of more than 1,000 days in the first quarter of 2016: New Jersey (1,234); Hawaii (1,110); New York (1,061); Utah (1,059); Florida (1,018); and Connecticut (1,007).

States with the shortest average time to foreclose in the first quarter of 2016 were Virginia (195 days); Mississippi (261 days); Wyoming (268 days); Tennessee (269 days); and Texas (272 days).

The full report can be read here.

Podcast : NJ driver’s car burned by an ugly auto loan

April 15th, 2016 by

Episode 14(4/14/16) Adam Deutsch tells the story a NJ driver’s car literally burned by an ugly auto loan.

Denbeaux and Denbeaux protected this NJ driver from a bad auto loan for a car that caught fire like this one…

In this story, a NJ driver took out a loan from a used car dealer for a Chrysler Sebring that was such a state that it spontaneously burst into flames.

… then from being sued to pay back on an auto loan for an Audi A6, like this one.

The dealer got a law firm to sue to collect the balance owed from the car owner. Not only were there TILA Truth in Lending Act violations galore, but the law firm lied and said the car loan was for an Audi A6. Learn what happened next in this podcast.

Tax Deadline Alert: 2015 Tax Returns Are Due April 18, 2016

April 11th, 2016 by

Due to an overlap of the tax deadline and Federal/State holidays, the IRS has announced some new due dates for the upcoming 2016 tax season.

Most 2015 individual income tax returns will actually be due on Monday, April 18, 2016 (rather than Friday, April 15, 2016). Here’s why:

Emancipation Day: April 15, 2016

Emancipation Day is an official public holiday in the District of Columbia. It usually falls on April 16, but when April 16 is a Saturday – which it is in 2016 – then Emancipation Day moves to the previous day (Friday).

Here is an excerpt from IRS Revenue Ruling 2015-13:

“The term ‘legal holiday’ includes a legal holiday observed in the District of Columbia…. Emancipation Day, April 16, is a legal holiday in the District of Columbia [D.C. Code § 28-2701 (2010)]. When April 16 is a Saturday, the preceding day is the observed holiday.”

That means Emancipation Day will be observed on Friday, April 15, 2016.

Since Emancipation Day is a legal holiday, it gets precedence over the April 15 tax deadline. Here is another excerpt from IRS Revenue Ruling 2015-13:

“Section 7503 of the Code provides that, when April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if it is filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday.”

That means the Federal tax deadline is pushed to the following Monday. Therefore, most individuals will have until Monday, April 18, 2016 to file their income tax return. Note that this also affects the deadline for the first installment payment of estimated income tax (see below).

Patriots’ Day (Maine & Massachusetts Only): April 18, 2016

In Maine and Massachusetts, Patriots’ Day is a statewide legal holiday that’s observed on the third Monday of April. In 2016, Patriots’ Day will coincide with the Federal tax deadline (which was shifted to Monday, April 18). Therefore, taxpayers in Maine and Massachusetts will have until Tuesday, April 19, 2016 to file their individual income tax returns.

Residents of Maine and Massachusetts get an extra day because the IRS offices in those states are closed on Patriots’ Day (April 18, 2016). Since taxpayers are allowed to file their returns by hand-delivering the forms to a local IRS office, the due date is extended to the following day (April 19, 2016).

Here is an excerpt from IRS Revenue Ruling 2015-13:

“Pursuant to Treasury Regulation § 1.6091-2(d)(1), individuals who reside in Massachusetts and Maine may elect to file their returns by hand at their local IRS Office located in Massachusetts or Maine. When the last day for residents of those states to file their returns by hand falls on a Saturday, Sunday or legal holiday, section 7503 extends the due date to the next succeeding day which is not a Saturday, Sunday or legal holiday. We interpret this rule to extend the due date for filing income tax returns for all residents of Massachusetts and Maine pursuant to section 7503, including those who do not elect to file by hand. Accordingly, the statewide observance of Patriots’ Day in Massachusetts or Maine affects the due date for income tax returns of individuals who reside in Massachusetts and Maine, but it does not affect the due date of income tax returns for individuals who do not reside in Massachusetts or Maine.”

Taxpayers in Maine and Massachusetts are granted the extra day, whether they file by snail mail, e-file, or hand-delivery to an IRS facility.

Estimated Income Tax Payments

The first installment payment for 2016 estimated tax (Form 1040-ES) is due by April 18, 2016 – the same deadline for 2015 Federal tax returns. The estimated tax deadline applies to all U.S. taxpayers, whether or not they reside in Maine or Massachusetts. This is because taxpayers in Maine and Massachusetts send their estimated tax payments to an IRS facility in another state (that does not observe Patriots’ Day). Therefore, in order to be considered timely, the first installment of 2016 estimated tax must be paid by Monday, April 18, 2016.

NOTE: This is not tax advice but is provided for informational and educational purposes only. Check with your accountant, or a trusted tax professional who can provide helpful information and advice about the ever changing tax code.