Predatory lending and predatory lending complaints
Create a cycle of debt
Research and monitoring from the Office of Consumer Affairs have confirmed that the debt cycle is at the heart of the payday lender business model. The majority of payday loans occur in long stretches of repeat loans, and most loans are taken out quickly one after another – over 80% of all payday loans are followed by another loan within 14 days.
In its enforcement actions, the Office of Consumer Affairs confirmed that trapping consumers in a cycle of debt is often standard industry practice. While investigating Ace Cash Express, the Office of Consumer Affairs discovered a training manual that asked employees to switch borrowers from one unaffordable loan to another.
- The Center for Responsible Lending estimates that payday lenders drain over $ 4 billion annually from consumers in states where this type of loan is permitted.
Nearly 10,000 complaints filed
In less than three years, consumers have filed nearly 10,000 payday loan complaints to the Office of Consumer Affairs database. More than half of the complaints concerned only 15 companies, while the rest of the complaints concerned 626 companies. When contacted by the Office of Consumer Affairs, the five companies with the most complaints responded with little or no relief, whether monetary or not. In particular, Delbert Services and CashCall, which share the same owner, offered no relief.
Poor communication and unexpected expenses
Over 35% of complaints submitted to the Office of Consumer Affairs about payday lenders were about lender communication tactics and unexpected fees or interest. Continued attempts to collect outstanding debts and take or threaten illegal action were the next biggest issues, each accounting for 12% of all complaints. Other issues included possible identity theft; overdraft fees charged because collection attempts caused a negative balance; involuntary closure of a bank account when repeated debt collection efforts have resulted in a serious overdraft in a borrower’s bank account; and payday loans in states where they are not permitted.
Work towards a solution
In June 2016, the Office of Consumer Affairs proposed a rule that took a historic step forward by requiring, for the first time, that payday lenders, auto securities and other high-cost installment lenders determine whether customers could afford to repay their loans with enough money to cover normal expenses without borrowing again. When reviewing the rule, we issued a
joint statement with 11 major consumer, civil rights and faith-based organizations urging that the draft rule be strengthened and that certain loopholes be filled.
A final rule announced in October 2017 took important steps to protect consumers nationwide from short-term payday loans and auto titles by establishing a principle of repayment capacity. The rule represents a significant victory against lenders who use a debt trap business model.
While the rule is a big step forward, high-cost payday lenders will be exempt from the new repayment capacity requirement for up to six loans per year for each client. Nonetheless, payday lenders continue to oppose this belated consumer protection.
In January 2018, the new acting director of the office announced that he was delaying and reopening the rule for further consideration. Meanwhile, opponents are asking Congress for votes to simply repeal it. We will work with policymakers to ensure that the delay does not weaken this important effort and that repeal attempts fail.
However, the rule makes it clear that states can continue to adopt stricter rules. For example, fifteen states plus the District of Columbia have already implemented strong state payday debt trap laws by enforcing a 36% interest rate cap. States should continue to enact and enforce price caps like these, as the Office of Consumer Affairs does not have the legal authority to do so.