The State of Lending in America : Debt-Trap Lending and its Impact on American Families Debbie Goldstein, Susanna Montezemolo, Pete Smith October 23, 2013

Debt-Trap Lending: Overview Common Features of Debt-Trap Products Product Lack of Underwriting Balloon Payment Triple-Digit APR Short-Term Due Date Collateral Car-Title LoansXXXXFamily Car Overdraft LoansXXXX Electronic Access to Bank Account Payday LoansXXXXPersonal Check Bank Payday LoansXXXX Electronic Access to Bank Account

Debt-Trap Lending: PAYDAY LOANS Overview Get Payday Loan Secured by Post- Dated Check Pay back principal & interest on payday Run out of money before next paycheck; get another payday loan to make ends meet

Debt-Trap Lending: PAYDAY LOANS Key Predatory Practices Con’t Repeat Borrowing Continues to Fuel Payday Lending StateTime Period % of loans to borrowers with 5+ loans/year % of loans to borrowers with 7+ loans/year % of loans to borrowers with 12+ loans/year Florida June 2010-May %85%63% Kentucky Jan Dec %88%70% Oklahoma Nov Oct %84%61% South Carolina Jan Dec %82%53% Average 91%85%62% Average from "Financial Quicksand" (published in 2006) 90%not available62% Source: State regulator reports of annual payday loan activity reported by state-regulated databases

Debt-Trap Lending: PAYDAY LOANS Borrower Impact Overview of non-bank payday loans: Median loan size $350, total interest $458 Average APR: 400% + Average 10 loans per year; 199 days per year (55%) indebtedness Total fees of $3.4 billion, at least $2.6 billion of which are a direct result of loan churn Overview bank payday loans: Median loan size: $100 Average loans per year: 13.5 Average APR % Over one-quarter receive Social Security Twice as likely to pay overdraft fees as bank customers as a whole

Sources: Debt-Trap Lending: PAYDAY LOANS Additional Consequences of Default

Debt-Trap Lending: PAYDAY LOANS Characteristics of Payday Borrowers Income: CFPB found median net income of around $22,500. States report higher average gross incomes of $30,000 in Colorado and around $33,000 in Illinois. Demographics: Pew: Five groups more likely to receive payday loans: those without college degrees, renters, African Americans, those earning under $40k, and those who are separated or divorced. Military Targeting: Decreased after passage of MLA. However, some lenders engage in subterfuge and offer high-cost, abusive open-end or installment payday loans, which are not covered under the Act.

Consumer-friendly changes in state laws have led to decline in total storefront locations nationwide and decline in total fees resulting from loan churn. However, important to note that where payday loans are offered, the debt trap causes very real harm to individuals Debt-Trap Lending: PAYDAY LOANS State Laws Have Caused an Industry Decline

Debt-Trap Lending: PAYDAY LOANS High-Cost Payday Loans Harm Families States with Most Storefront Locations Texas California Florida Tennessee Alabama States with Highest Total Payday Fee Drain Texas California Florida Mississippi Alabama

Debt-Trap Lending: PAYDAY LOANS Movement to Payday Installment Loans In states with little to no regulation of installment loans, particularly those with no rate cap, payday lenders have increasingly migrated to high-cost installment loans. Payday lenders pushing debt trap payday installment proposals in states that have significant payday regulations Some states specifically authorize payday installment loans These payday-like installment loans are still structured as debt trap products

Debt-Trap Lending: PAYDAY LOANS Effective State and Federal Action Con’t Federal regulators have cracked down on bank payday lending: o The OCC and FDIC proposed guidance directing their banks to avoid payday lending; will be finalized soon. o The Federal Reserve Board issued a similar supervisory statement to its banks. The CFPB is preparing for a major rulemaking on payday lending that would cover all lenders, regardless of size or type. States have been effective at enforcing state laws

Debt-Trap Lending: PAYDAY LENDING Questions?

Debt-Trap Lending: CAR-TITLE LOANS Overview Borrowers renew loans repeatedly. Lender may repossesses vehicle (after multiple loans) Borrower Experiences $ Shortfall Trades Car Title (for Car Owned Free-and-Clear) for 300% APR Loan Cannot Afford to Repay Loan in 30 Days

Debt-Trap Lending: CAR-TITLE LOANS Similarities to Payday Loans Similarities between Payday and 30-Day Balloon Payment Car Title Loans FeaturesPayday loans30-Day Balloon Payment Car Title Loans Typical loan size$350$1,042 Fee Charged$15 per $100 borrowed$25 per $100 borrowed Underwriting for AffordabilityNone Typical Loan Term14 days, but often renewed30 days, but often renewed Typical APR400% or more300% Collateral Post-dated check or electronic bank account access Title to vehicle (Threat of Repossession) Typical Number of Renewals98

Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact Car-title loans are available in 21 states and cost borrowers $4.3 billion fees alone for $1.9 billion in non-churn loans. Car-title lenders lend a fraction of the car’s cost—26%—and use a car as collateral yet still make loans at 300% APR. Repossession fees compound the problem: fees averaging $ and equaling half of a typical borrower’s loan balance get tacked on when a borrower defaults.

Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact Total Borrower Cost of a Typical 30-Day Car-Title Loan Average principal borrowed$1,042 Fee for first loan$261 8 additional renewal fees$2,088 Total fees paid$2,349 Total amount paid in principal and fees and principal for a $1,059 loan$3,391 Average car value$4,008

Debt-Trap Lending: CAR-TITLE LOANS Borrower Impact Con’t Repossession is Very Real—and Very Expensive One in six (17%) of borrowers incurred a repossession fee, typically $ and averaging half of the borrower’s outstanding balance. In New Mexico, it is much higher, with fully 60% of car-title customers permanently losing their vehicle in New Mexico Car Title Repossession and Vehicle Loss Rates by Customer Year Repossession Rate by Customer 28.7%20.2%53.1%47.5%71.2% Vehicle Loss Rate by Customer 14.6%13.0%41.0%37.0%60.1% Source: Martin & Adams 2012

Debt-Trap Lending: CAR-TITLE LENDING Questions?

Debt-Trap Lending: OVERDRAFTS Overview Bank Repays Itself in Full at Next Deposit Transaction Overdraws Account Bank Lends Funds Anyway Levies High- Cost Fee

Debt-Trap Lending: OVERDRAFTS Key Predatory Features Debt-trap Structure Automatic Set-off Transaction Reordering

Debt-Trap Lending: OVERDRAFTS Key Predatory Features Con’t Transaction Reordering Example: Bad

Debt-Trap Lending: OVERDRAFTS Key Predatory Features Con’t Transaction Reordering Example: Worse

Debt-Trap Lending: OVERDRAFTS Borrower Impact In 2011, overdraft fees cost consumers $16.7 billion. Two-thirds of these penalty fees are paid by account holders charged more than six fees per year.

Debt-Trap Lending: OVERDRAFTS Borrower Impact

Debt-Trap Lending: OVERDRAFTS High-Cost Overdrafts Harm Families Debt-Trapped Borrowers = Banks’ Bread and Butter

Debt-Trap Lending: PAYDAY LENDING Questions?

The State of Lending: Debt-Trap Lending MAJOR MEDIA INTEREST AND COVERAGE “Payday loans have long been huge financial traps for cash- strapped, low-income borrowers. Several states have tightened regulations to clamp down on these ‘quick fix’ loans … But a lot more needs to be done ….” New York Times Editorial, 9/16/13

The State of Lending: The Final Chapters Predatory Practices and Abuses in Debt Buying and Debt Collection The Cumulative Impact of Predatory Lending Late 2013/Early 2014

For More Information Debbie Goldstein, Executive Vice President Allyn Summa, Director of Development