Consumer Lending/Payday Loans (resource material).
Mar 10, 2018 14:41:10 GMT
alison, Butch Cassidy, and 3 more like this
Post by Deleted on Mar 10, 2018 14:41:10 GMT
Hi,
some of our membership may have a % of their portfolio's invested in Consumer Credit/Payday Lending platforms, so with a little time to spare I thought I'd spend some time delving around on Google to try and find some useful resource material, the articles that follow both originate in the USA yet it would be reasonable to extrapolate these as applicable to the UK also.
In a bid to truncate I've abridged them here but it you'd like to read the full texts as well then I've included the applicable links at the end of the post.
All the best, J.
(my highlights).
A/ On Poverty, Interest Rates, and Payday Loans.
MEGAN MCARDLE NOV 18, 2009
Payday loans are a different question. There's a lot of literature on them, but most of it agrees on a few points. For our purposes, the salient characteristics of payday borrowers are a) they have little-to-no money in the bank b) they have moderate incomes and c) they are fairly severely credit constrained. Virtually all payday borrowers use some other sort of credit (Stegman and Faris, 2003). At least 60% of them have access to a credit card (Lawrence and Elliehausen, 2008). 73% of them have been turned down for a loan in the past five years, or received less credit than they asked for. If they're turning to payday loans, it's because they have maxed out those other forms of credit, and they have some pressing cash flow need.
Payday borrowers do not necessarily turn to payday lending out of ignorance; a majority of them seem to be aware that this is a very, very expensive form of financing. They just have no better options.
The biggest problem with payday loans is not the one-time fee, though that is steep; it's that people can get trapped in a cycle of rolling them over. Paying $15 to borrow a few hundred bucks in an emergency is bad, but it's probably manageable for most people. Unfortunately, since payday borrowers are credit constrained, have little savings, and are low-to-moderate income, they often have difficulty coming up with the principal when the loan is due to pay off. The finance charges add up, making it difficult to repay the loan.
According to Lawrence and Ellihausen, about 40% of payday borrowers fall into that problem category: they have rolled over a loan five or more times in the past year. A hard core of about 20% had rolled over 9 or more advances.
Judging who is worse off is a pretty tricky task. Would payday borrowers be better off if they had no other debt, and could go to their credit union for a tidy personal loan? That's unquestionable. By the time they're at the payday loan stage, however, that doesn't seem as if it's usually an option. I'd say that the people who are rolling over 9 or more loans are definitely worse off, the people rolling over 5-9 loans are probably worse off, and the majority who are rolling their loans over no, or a few times are probably better off, given the circumstances they were in when the time came to get the loan. People who roll over loans only a few times are not trapped in a debt cycle, and (I'd guess) are unlikely to have been using the loans for ordinary expenses.
There's some experimental and empirical evidence to support this. Wilson, et al (2008) built an experimental model of credit-and-cash constrained households, and found that adding payday loans contributed significantly to household financial survival in the lab.
But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more--and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group.
There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. If we could constrain them during that period from maxing out their available credit, they'd never need a payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow.
But I'm not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don't know whether that's because they're irresponsible, or because they had a string of really crappy bad luck. I'm not sure it matters.
The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan.
And those loans are jaw-droppingly expensive. Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society's most financially unstable people, smiles at himself in the mirror every morning.
In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I always wonder if I'm not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others--I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don't see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.
B/ Payday Loans: Study Highlights Default Rates, Overdrafts As Groups Debate CFPB Regulations
BY CATHERINE DUNN @catadunn ON 03/31/15 AT 12:20 AM
A lender makes a loan. Then a borrower pays it back. And to make sure that transaction doesn’t tank, there’s "underwriting:" verifying that the borrower will indeed be able to make the payments. This last step would be a key lesson from the subprime mortgage crisis.
But too often, federal regulators say, that step is missing from payday loans sold to the working poor, leading borrowers straight into a debt trap. The Consumer Financial Protection Bureau (CFPB), last week, unveiled a proposal for new rules that would make loans more affordable by giving lenders a choice. They could gauge a borrower’s ability to pay before making the loan, or have the option of offering a capped number of loans to a borrower, with an exit strategy for loans that become too much to handle.
As the debate gets under way about how stringent final regulations should be, many consumer advocates are heavily in favor of option A, and don’t even want option B on the table, arguing that it’s easier to keep borrowers from entering a debt trap than it is to pull them out later on. A new study published Tuesday by the Center for Responsible Lending argues that early default rates demonstrate why upfront underwriting is the way to go.
“We need that ability to repay to be on the front end, from that first loan, because that’s when people are starting to default,” says Susanna Montezemolo, a senior policy researcher at the Center for Responsible Lending, and co-author of the report, “Payday Mayday: Visible and Invisible Payday Lending Defaults.”
Payday loans are typically secured with either a post-dated check from the borrower, or by giving the lender access to the borrower’s bank account. As soon as a borrower gets paid at work, the lender is “first in line” to get paid on a loan that often comes with triple-digit interest.
“They time the payment when you’re most flush,” says Montezemolo. “Theoretically, payday default rates should be pretty low.”
However, that’s not what the center found. The report analyzed 1,065 borrowers in North Dakota who took out their first payday loans in 2011. The state allows borrowers to renew payday loans, and using a database of lending activity in the state, researchers were able to track the borrowers over time, and across different lenders from whom they may have borrowed. Nearly half of the payday borrowers -- 46 percent -- defaulted within two years. A third of the borrowers defaulted within six months.
Those findings are consistent with previous studies, the paper says, including a 2008 analysis by researchers at Vanderbilt University and the University of Pennsylvania. It showed a 54 percent default rate among payday loan borrowers in Texas within one year. Another study by the Center for Responsible Lending, in 2011, found a 44 percent default rate within two years in Oklahoma.
Perhaps more surprising to Montezemolo, then, wasn’t the high rate of default, but the timing of the defaults: among those who defaulted, nearly half did so on either their first loan (22 percent) or their second loan (26 percent).
Numbers like that raise the question -- if the default rate is so high, how could the business model last?
As it turns out, default doesn’t spell the end of paying the lender, or of taking out another payday loan: 66 percent of borrowers who defaulted still wound up repaying their entire debt. Nearly two in five (39 percent) of people who defaulted borrowed again later on.
So even though a default is financially stressful for the borrower -- “You don’t have enough money to pay it back on your actual payday,” Montezemolo says -- a default doesn’t appear to pose as much risk to the lender. Indeed, CFPB Director Richard Cordray, at field hearing last Thursday in Richmond, Virginia, said that many (Payday) lenders rely on their "ability to collect" payments rather than on the customers' ability to repay loans, according to the bureau's research.
Looking at the repayment rate among defaulted borrowers in North Dakota, Montezemolo says, “I would suspect it has to do with debt collection activities, not your ability to repay the loans.”
The CFPB, for example, levied a $10 million enforcement action last year against the large payday lender ACE Cash Express, citing, in part, “illegal debt collection tactics -- including harassment and false threats of lawsuits or criminal prosecution -- to pressure overdue borrowers into taking out additional loans they could not afford."
Overdrafts from borrowers’ bank accounts also insulate lenders from defaults, according to the Center for Responsible Lending. Using a separate dataset of 52 payday borrowers, the study found that 33 percent experienced an overdraft on the same day they made a payday loan payment.
It’s what the researchers call an “invisible default," since it never shows up on the payday lender’s books. If not for overdrafts, serving to paper over defaults, the actual default rate would likely be higher, and would illustrate greater borrower distress, Montezemolo says.
Links to full texts c/w onward links + citations. Credit given here to the Author's and their respective Publishers:
A/ www.theatlantic.com/business/archive/2009/11/on-poverty-interest-rates-and-payday-loans/30431/
B/ www.ibtimes.com/payday-loans-study-highlights-default-rates-overdrafts-groups-debate-cfpb-regulations-1864480
Personal observations:
*A/ Excellent 'Underwriting' prior to lending is an essential prerequisite to reducing borrower default rates.
B/ There is a correlation between increasing lending APR's and a higher default risk eg 250% APR equates to a circa 10-20% default rate among borrowers, 600% APR equates to a circa 45-55% default rate. Default rates vs Increasing APR's appear linear.
*C/ Robust, Early Intervention combined with Fair debt recovery measures are essential to minimizing any defaults migrating to bad debt. Excellent Credit Control procedures are key to successful. outcomes.
*A/ & C/ are vital core principles in delivering profitability from Payday lending activities.
Butch Cassidy , rzys, ilmoro , mike1963 , Greenwood2 , marka , shimself , michaelc , holmes , df , sayyestocress
some of our membership may have a % of their portfolio's invested in Consumer Credit/Payday Lending platforms, so with a little time to spare I thought I'd spend some time delving around on Google to try and find some useful resource material, the articles that follow both originate in the USA yet it would be reasonable to extrapolate these as applicable to the UK also.
In a bid to truncate I've abridged them here but it you'd like to read the full texts as well then I've included the applicable links at the end of the post.
All the best, J.
(my highlights).
A/ On Poverty, Interest Rates, and Payday Loans.
MEGAN MCARDLE NOV 18, 2009
Payday loans are a different question. There's a lot of literature on them, but most of it agrees on a few points. For our purposes, the salient characteristics of payday borrowers are a) they have little-to-no money in the bank b) they have moderate incomes and c) they are fairly severely credit constrained. Virtually all payday borrowers use some other sort of credit (Stegman and Faris, 2003). At least 60% of them have access to a credit card (Lawrence and Elliehausen, 2008). 73% of them have been turned down for a loan in the past five years, or received less credit than they asked for. If they're turning to payday loans, it's because they have maxed out those other forms of credit, and they have some pressing cash flow need.
Payday borrowers do not necessarily turn to payday lending out of ignorance; a majority of them seem to be aware that this is a very, very expensive form of financing. They just have no better options.
The biggest problem with payday loans is not the one-time fee, though that is steep; it's that people can get trapped in a cycle of rolling them over. Paying $15 to borrow a few hundred bucks in an emergency is bad, but it's probably manageable for most people. Unfortunately, since payday borrowers are credit constrained, have little savings, and are low-to-moderate income, they often have difficulty coming up with the principal when the loan is due to pay off. The finance charges add up, making it difficult to repay the loan.
According to Lawrence and Ellihausen, about 40% of payday borrowers fall into that problem category: they have rolled over a loan five or more times in the past year. A hard core of about 20% had rolled over 9 or more advances.
Judging who is worse off is a pretty tricky task. Would payday borrowers be better off if they had no other debt, and could go to their credit union for a tidy personal loan? That's unquestionable. By the time they're at the payday loan stage, however, that doesn't seem as if it's usually an option. I'd say that the people who are rolling over 9 or more loans are definitely worse off, the people rolling over 5-9 loans are probably worse off, and the majority who are rolling their loans over no, or a few times are probably better off, given the circumstances they were in when the time came to get the loan. People who roll over loans only a few times are not trapped in a debt cycle, and (I'd guess) are unlikely to have been using the loans for ordinary expenses.
There's some experimental and empirical evidence to support this. Wilson, et al (2008) built an experimental model of credit-and-cash constrained households, and found that adding payday loans contributed significantly to household financial survival in the lab.
But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more--and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group.
There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. If we could constrain them during that period from maxing out their available credit, they'd never need a payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow.
But I'm not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don't know whether that's because they're irresponsible, or because they had a string of really crappy bad luck. I'm not sure it matters.
The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan.
And those loans are jaw-droppingly expensive. Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society's most financially unstable people, smiles at himself in the mirror every morning.
In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I always wonder if I'm not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others--I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don't see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.
B/ Payday Loans: Study Highlights Default Rates, Overdrafts As Groups Debate CFPB Regulations
BY CATHERINE DUNN @catadunn ON 03/31/15 AT 12:20 AM
A lender makes a loan. Then a borrower pays it back. And to make sure that transaction doesn’t tank, there’s "underwriting:" verifying that the borrower will indeed be able to make the payments. This last step would be a key lesson from the subprime mortgage crisis.
But too often, federal regulators say, that step is missing from payday loans sold to the working poor, leading borrowers straight into a debt trap. The Consumer Financial Protection Bureau (CFPB), last week, unveiled a proposal for new rules that would make loans more affordable by giving lenders a choice. They could gauge a borrower’s ability to pay before making the loan, or have the option of offering a capped number of loans to a borrower, with an exit strategy for loans that become too much to handle.
As the debate gets under way about how stringent final regulations should be, many consumer advocates are heavily in favor of option A, and don’t even want option B on the table, arguing that it’s easier to keep borrowers from entering a debt trap than it is to pull them out later on. A new study published Tuesday by the Center for Responsible Lending argues that early default rates demonstrate why upfront underwriting is the way to go.
“We need that ability to repay to be on the front end, from that first loan, because that’s when people are starting to default,” says Susanna Montezemolo, a senior policy researcher at the Center for Responsible Lending, and co-author of the report, “Payday Mayday: Visible and Invisible Payday Lending Defaults.”
Payday loans are typically secured with either a post-dated check from the borrower, or by giving the lender access to the borrower’s bank account. As soon as a borrower gets paid at work, the lender is “first in line” to get paid on a loan that often comes with triple-digit interest.
“They time the payment when you’re most flush,” says Montezemolo. “Theoretically, payday default rates should be pretty low.”
However, that’s not what the center found. The report analyzed 1,065 borrowers in North Dakota who took out their first payday loans in 2011. The state allows borrowers to renew payday loans, and using a database of lending activity in the state, researchers were able to track the borrowers over time, and across different lenders from whom they may have borrowed. Nearly half of the payday borrowers -- 46 percent -- defaulted within two years. A third of the borrowers defaulted within six months.
Those findings are consistent with previous studies, the paper says, including a 2008 analysis by researchers at Vanderbilt University and the University of Pennsylvania. It showed a 54 percent default rate among payday loan borrowers in Texas within one year. Another study by the Center for Responsible Lending, in 2011, found a 44 percent default rate within two years in Oklahoma.
Perhaps more surprising to Montezemolo, then, wasn’t the high rate of default, but the timing of the defaults: among those who defaulted, nearly half did so on either their first loan (22 percent) or their second loan (26 percent).
Numbers like that raise the question -- if the default rate is so high, how could the business model last?
As it turns out, default doesn’t spell the end of paying the lender, or of taking out another payday loan: 66 percent of borrowers who defaulted still wound up repaying their entire debt. Nearly two in five (39 percent) of people who defaulted borrowed again later on.
So even though a default is financially stressful for the borrower -- “You don’t have enough money to pay it back on your actual payday,” Montezemolo says -- a default doesn’t appear to pose as much risk to the lender. Indeed, CFPB Director Richard Cordray, at field hearing last Thursday in Richmond, Virginia, said that many (Payday) lenders rely on their "ability to collect" payments rather than on the customers' ability to repay loans, according to the bureau's research.
Looking at the repayment rate among defaulted borrowers in North Dakota, Montezemolo says, “I would suspect it has to do with debt collection activities, not your ability to repay the loans.”
The CFPB, for example, levied a $10 million enforcement action last year against the large payday lender ACE Cash Express, citing, in part, “illegal debt collection tactics -- including harassment and false threats of lawsuits or criminal prosecution -- to pressure overdue borrowers into taking out additional loans they could not afford."
Overdrafts from borrowers’ bank accounts also insulate lenders from defaults, according to the Center for Responsible Lending. Using a separate dataset of 52 payday borrowers, the study found that 33 percent experienced an overdraft on the same day they made a payday loan payment.
It’s what the researchers call an “invisible default," since it never shows up on the payday lender’s books. If not for overdrafts, serving to paper over defaults, the actual default rate would likely be higher, and would illustrate greater borrower distress, Montezemolo says.
Links to full texts c/w onward links + citations. Credit given here to the Author's and their respective Publishers:
A/ www.theatlantic.com/business/archive/2009/11/on-poverty-interest-rates-and-payday-loans/30431/
B/ www.ibtimes.com/payday-loans-study-highlights-default-rates-overdrafts-groups-debate-cfpb-regulations-1864480
Personal observations:
*A/ Excellent 'Underwriting' prior to lending is an essential prerequisite to reducing borrower default rates.
B/ There is a correlation between increasing lending APR's and a higher default risk eg 250% APR equates to a circa 10-20% default rate among borrowers, 600% APR equates to a circa 45-55% default rate. Default rates vs Increasing APR's appear linear.
*C/ Robust, Early Intervention combined with Fair debt recovery measures are essential to minimizing any defaults migrating to bad debt. Excellent Credit Control procedures are key to successful. outcomes.
*A/ & C/ are vital core principles in delivering profitability from Payday lending activities.
Butch Cassidy , rzys, ilmoro , mike1963 , Greenwood2 , marka , shimself , michaelc , holmes , df , sayyestocress
