«Prepared for: Community Financial Services Association of America Prepared by: Arthur Baines Marsha Courchane Steli Stoianovici Charles River ...»
Economic Impact on Small Lenders
of the Payday Lending Rules under
Consideration by the CFPB
Community Financial Services Association of America
Charles River Associates
May 12, 2015
May 12, 2015 Page 1 of 19
Table of Contents
Payday Lending Industry Overview
CFPB’s Proposed Rules
Methodology and Findings
The Prevention Requirements
The Alternative Requirements
Payday Loan Revenue Changes
Results of the Estimated Revenue Changes
Net Income Changes
Results of the Estimated Net Income Changes
Appendix A. Loan Level Data: CRA vs. CFPB
Appendix B. Alternative Requirements Example
Appendix C. Payday Lending Revenue vs. Population Density
About the Financial Economics Practice at Charles River Associates
The Community Financial Services Association of America (“CFSA”) retained Charles River Associates (“CRA”) to evaluate the likely impact on small payday lenders of the rules under consideration by the Consumer Financial Protection Bureau (“CFPB”).1 This study includes an evaluation of the impact on the payday lending revenues and profitability of small payday lenders.
Using loan level data and income statements collected from a sample of small payday lenders, we estimate that the proposals are likely to impact the lenders both negatively and significantly. The Proposed Rules will likely make the small stores that offer payday loans unprofitable on average, resulting in significant losses for small payday lenders.
The application of the CFPB’s considered alternative requirements to data from 2013 would have reduced the payday loan revenues of small lenders by 82% on average.
The impact of this revenues reduction would have resulted in a change to net income per store from a +$37,000 profit to a -$28,000 loss, on average (or a decrease of about $66,000 on average). We lack sufficient data to analyze reliably the impact of the CFPB’s proposed ability to repay requirements, but that impact may also be significant.
PAYDAY LENDING INDUSTRY OVERVIEW
A payday loan is a single-payment short-term small value unsecured loan.2 In many cases, the lender holds a personal check issued by the debtor in the amount of principal plus interest until the maturity of the loan. The transaction could also be based on an agreement authorizing the lender to make an electronic withdrawal from the borrower’s checking account on the maturity date. Underwriting standards vary across lenders, but the lender generally requires proof of the borrower’s income (recent pay stubs usually suffice) and that the borrower has a checking account. A lender could assess the applicant’s previous performance on payday loans it granted previously. Some lenders have developed more sophisticated in-house risk assessment software, or rely on thirdparty providers (e.g., CoreLogic Teletrack), to assess default risk considering such factors as the applicant’s performance on payday loans and/or other credit products. In certain states, a lender checks a state-level database to identify payday loans granted to the applicant by other lenders in that state. For example, a lender could verify the applicant’s outstanding balance of all other payday loans to ensure that the loan under consideration would not result in indebtedness exceeding the state cap. The maturity date for loan repayment usually coincides with the borrower’s next paycheck or date-ofdeposit of other funds. At maturity, either the personal check from the debtor is deposited by the lender or the borrower pays in cash to redeem the check.
Payday lenders are regulated primarily at the state level, and there are variations in the restrictions that exist across states. For example, there are requirements regarding the maximum fees and/or interest that can be charged, the maximum loan amount, the 1 Small Business Advisory Review Panel for Potential Rulemakings for Payday, Vehicle Title, and Similar Loans. Outline of Proposals Under Consideration and Alternatives Considered, CFPB March 26, 2015;
available at http://files.consumerfinance.gov/f/201503_cfpb_outline-of-the-proposals-from-smallbusiness-review-panel.pdf, last accessed on 4/28/2015 (“CFPB’s Proposed Rules”).
2 Also known as deferred deposit, deferred presentment transaction, post-dated check loan, payday advance, deposit advance or cash advance loan.
May 12, 2015 Page 3 of 19 maximum number of rollovers or renewals, assets and bond requirements, and license and registration requirements. In certain states, such restrictions have contributed to no lender operating in those states.3 At the federal level, the restrictions imposed on the payday loans to active duty service members and their spouses, children, and other dependents by the 2007 National Defense Authorization Act have effectively led lenders to stop offering payday loans to this group. In addition, payday lenders are subject to various federal regulations such as The Truth in Lending Act and the Equal Credit Opportunity Act.
Based on the latest data available, there were about 19,000 payday lender locations in 36 states during 2012, each of which had, on average, about 2.5 employees involved directly in payday lending.4, 5
CFPB’S PROPOSED RULES
The CFPB is considering the imposition of new rules that would place restrictions on the provision of certain short-term and longer-term loans. Covered short-term loans would include loans with maturity no longer than 45 days. The covered longer-term products would include loans with maturity longer than 45 days with an all fees included annual percentage rate greater than 36% “where the lender obtains a preferred repayment position by either obtaining (1) access to repayment through a consumer’s account or paycheck, or (2) a non-purchase money security interest in the consumer’s vehicle.”6, 7 Most payday loans currently offered will be considered short-term products under the CFPB’s Proposed Rules. As a result, our study focused only on the effects of the shortterm loans provisions.
The CFPB is considering allowing a lender to choose among two sets of restrictions:
The prevention (ability to repay) requirements; and • The protection (alternative) requirements.
• The Prevention Requirements Under these rules, for each loan application, the lender must determine, for an underwriting period defined from the loan origination date until 60 days after the loan maturity date, that the borrower has the ability to repay the loan without reborrowing or defaulting, while satisfying any major financial obligations and living expenses, such as food and transportation. Under the ability to repay requirements, the lender would be 3 See, for example, http://www.ncsl.org/research/financial-services-and-commerce/payday-lending-statestatutes.aspx, last accessed on 4/29/2015.
4 This does not include the locations of some depository institutions that offered deposit advances, tribal lenders or other entities not licensed or registered with state regulators to engage in payday lending.
5 Economic Impact of the Payday Lending Industry, prepared for CFSA, Marsha Courchane and Steli Stoianovici, Charles River Associates, July 8, 2014.
6 The CFPB’s Proposed Rules, p. 6.
7 The CFPB’s Proposed Rules do not cover overdraft services, pawn loans, credit card accounts, student loans, and real estate secured loans.
May 12, 2015 Page 4 of 19 required to consider, document and verify the applicant’s income, credit history, financial obligations, including any housing payments (including mortgage or rent payments), debt obligations, child support or other legally required payments. The lender would also be required to consider the borrower’s recent borrowing history, including the history with other payday loan lenders. A lender is prohibited from granting more than three loans in a sequence; with a loan sequence consists of any loan that is taken out within 60 days of another outstanding loan. In addition, the lender is allowed to grant a second or third loan in a sequence only if it can document and verify that the applicant’s ability to repay has improved.
The Alternative Requirements A lender can choose to grant a loan without meeting the ability to repay constraints if it meets the alternative requirements. These consist of screening requirements and structural limitations. In addition to verifying the applicant’s income and borrowing history, the consumer cannot take out a loan if (i) the consumer has an outstanding payday loan with any lender; (ii) the loan is part of a sequence with more than three loans; (iii) the new loan would result in the consumer receiving more than six loans in the last 12 months; (iv) the new loan would result in the borrower being in debt (on payday loans) for more than 90 days in the last 12 months. The structural limitations impose a cap on the loan amount ($500) and term (45 days), and require the loans in a sequence to taper off. The lender could either decrease the principal for the second and third loan in a sequence, or could allow a no-cost four installments extension of the third loan in a sequence.
The rules under consideration also include collection restrictions and compliance requirements, including written notification to borrowers prior to each attempt to collect payment (even though the borrower already authorized the lender for that purpose at origination). After two failed attempts to receive the loan payment from the borrower’s account, the lender would have to obtain a new authorization from the borrower.
METHODOLOGY AND FINDINGS
DATA CRA received loan level data and financial information from a sample of small payday lenders which are CFSA or Financial Service Centers of America members.
The loan level data (“Loan Data”) consist of loan transactions from eight lenders and include information on loan characteristics and performance (loan amount, fees, loan date, term, the date the loan was paid), on the borrower (social security number, income, pay period) and on the store that originated the loan (state, zip code). Most of the lenders provided two years of data, for loans originated in 2012 and 2013. The Loan Data used in the analysis reflect 1.8 million loans to 150,000 consumers across 234 stores and 16 states. A typical loan, as measured by the median statistic, was for $255 with a term of 14 days and generated a $45 fee. The loans in the data we analyze are May 12, 2015 Page 5 of 19 typically smaller than the loans included in the data CFPB collected ($255 vs. $350).8 However, the usage patterns are similar – see Appendix A.9 We also received monthly Profit & Loss (“P&L”) statements at store level from six small lenders, mostly for a 2-year period, covering about 200 stores with payday lending revenues across 15 states. The level of detail of each revenue or cost category reflected the financial reporting practices of the particular lender. For the stores analyzed, the revenues from payday loans represented about 92% of the companies’ total revenues in 2013. During 2013, the stores averaged $37,000 in positive net profits as measured by net income.
THE PREVENTION REQUIREMENTSWe expect that the ability to repay requirements would require substantial changes to the operations of payday lenders. The CFPB envisions payday loan underwriting standards that appear to be more stringent than the standards used by mortgage originators. Given the typical loan size and the state specific fee caps which are applicable in most of the states in which the payday lenders operate, lenders may find it difficult to recover the additional costs generated by the compliance with the proposed requirements.
We lack sufficient data to estimate how many of the loans previously granted by lenders would have failed to meet the prevention requirements. In addition, these extensive documentation and verification requirements appear to change the product dramatically.
As a result, estimating the demand for such a “new” product based on current payday loan data might be unreliable.