Mississippi Department of Banking & Finance expects cooling off period, caps on number of loans
An analysis of payday lending by the U.S. Consumer Financial Protection Bureau may be a prelude to establishing a “cooling off” period between loans taken out by chronic borrowers.
The move could have a huge impact in Mississippi, where approximately 1,000 payday lending outlets do $1 billion in lending to a working population that often struggles to meet expenses between paychecks. While the lenders give distressed borrowers an outlet, the costs to the consumer are high — nearly $75 in interest on a $320 loan the worker must repay by his next payday. The loan float is usually a span of no more than two weeks, though Mississippi‘s 2012 renewal of the law extended the repayment period to 28 days.
The Mississippi Department of Banking & Finance says it appears the analysis sets the stage for new regulations from the bureau created as a consumer watchdog under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. “The study indicates they have some concerns,” said deputy banking commissioner Theresa Brady. “We should all expect to see some changes — maybe a cooling off period and a cap on the number of loans.”
Mississippi’s payday lending law, first enacted in 1998 and recently renewed without an expiration date, forbids rollover loans. However, that does not prevent a Mississippi borrower from having loans out with more than one lending operation. “Nothing prevents you from paying one off and getting another one immediately,” Brady said. “That’s what the cooling off period is all about.”
Brady said her department estimates nearly four million payday loan transactions occurred in Mississippi in 2012, advancing $1 billion in loans.
The timeouts on borrowing would be aimed at slowing the frequency of loans taken out by the type of borrowers the analysis found receive a new loan the same day they pay off an old one.
As a consequence, says the bureau, many consumers are unable to repay their loan and still meet their other expenses. “Thus, they continually re-borrow and incur significant expenses to repeatedly carry this debt from payday to payday,“ said the bureau in a recently released white paper titled “Payday Loans and Deposit Advance Products.”
The study concluded payday loans secured in storefront shops and deposit advances provided by some of the nation’s largest banks are a necessary resource for borrowers who have an immediate expense that needs met or have a significant enough influx of cash by the next payday to retire the debt.
But beyond those loan circumstances, the borrower takes on a far more risky and problematic profile, according to the bureau.
The cost of a payday loan is a fee that is typically based on the amount advanced, and does not vary with the duration of the loan. The cost is usually expressed as a dollar fee per $100 borrowed. Fees at storefront payday lenders generally range from $10 to $20 per $100, though loans with higher fees are possible, the bureau said in its report.
At that rate, a typical 14-day loan would yield an APR of 391 percent on a typical 14-day loan, the bureau. Payday lenders nationally and in Mississippi have called the APR comparison invalid because payday loans are extended between paychecks and an annual percentage rate would not apply.
The bureau’s sample for analysis consisted of consumers who had a loan in its dataset the first month of a 12-month period and then tracked usage across this timeframe.
“We limit our analysis to this subset of consumers because one focus of our analysis is sustained use, and consumers that we initially observe later in the data can only be followed for a more limited time,” the bureau said.
Two-thirds of payday borrowers in the sample had seven or more loans in a year. “Most of the transactions conducted by consumers with seven or more loans were taken within 14 days of a previous loan being paid back — frequently, the same day as a previous loan was repaid,” the bureau said.
“Similarly, over half of deposit advance users in our sample took out advances totaling over $3,000. This group of deposit advance users tended to be indebted for over 40 percent of the year, with a median break between advance balance episodes of 12 days or less.”
In its regulation setting and rule making, the bureau says it evaluate the prospective effectiveness of “limitations such as cooling off periods, in curbing sustained use and other harms.”
A separate analysis is underway on consumers using online payday loans. The difficulty of regulating online loans was raised to support the need for having storefront payday outlets in Mississippi that can be regulated. Among those supporters who cited concerns over increased Internet payday lending, especially by offshore operators, was former Mississippi banking commissioner John Allison.
For now, the Consumer Finance Protection Bureau is serving notice it intends to enact new rules and limits. “The potential consumer harm and the data gathered to date are persuasive that further attention is warranted to protect consumers,” the bureau said in concluding its report.
Borrower income reported at application
25th percentile $14,172
75th percentile $33,876
White Papers of Payday Loans and Deposit Advance Products – Consumer Financial Protection Bureau