As part of its Making two ends meet, the CFPB published a report last week on how consumers use payday loans, auto titles and pawn shops (“alternative financial services” or “AFS”) and the other sources of credit available to them. The consumers surveyed include only those with a traditional credit history, and the sampling focused on consumers with lower credit scores, recent credit defaults, or living in rural areas.
Many consumers who obtained an AFS product in 2019 were still using AFS products in 2020. The 2019 survey asked consumers if they had obtained an AFS product in the previous 6 months and found the following usage rates : 4.4% for payday loans (defined as “a loan that you must pay off, make a payment or roll over on your next payday”), 2% for auto title loans and 2.5% for loans on pledge. Of those who have used an AFS product in the past six months, at the time of the survey, 63% still owed a payday loan, 83% still had an auto title loan, and 73% still owed a pawnshop and 48% percent of consumers specifically said they had renewed at least one payday loan in the past six months. The 2020 survey extended the retrospective period to 12 months and found the following utilization rates: 5.7% for payday loans, 2.9% for auto title loans and 2.5% for loans on pledge. The survey also found that 52% of consumers who said they used a payday loan in 2019 also used one in 2020, while only 3.5% of consumers who did not use a payday loan in 2019 reported using a payday loan. declared having used one in 2020.
The report states that 74% of AFS users in the previous year reported experiencing an income or expense shock in the same year, compared to only 57% of non-AFS users. The report also states that in June 2019, 77% of AFS users reported experiencing a financial shock and having difficulty paying a bill or expense, compared to 29% of non-AFS users. Additionally, 10% of AFS users reported difficulty paying a bill or expense without experiencing financial shock. Regarding the impact on liquidity of consumers who reported difficulty paying a bill due to an adverse event, the report states that after paying the expense, AFS users had a median deficit of $ 800, compared to a median of $ 435 in funds available to non-AFS users.
The report finds that over 60% of AFS users had poor or very bad credit scores, which affects their options for paying bills or spending. Among AFS users who said they requested credit in the past year, 60% said they were turned down or offered less credit than requested. Among AFS users who had not applied for credit in the past year, 48% said they had not done so because they expected the request to be denied. Among borrowers who had obtained a loan in the past six months and still owed money in June 2019, 63% of AFS users reported having a credit card, but only 28% of loan borrowers on Salary had at least $ 300 of available credit as of June 2019, as did 33% of auto securities borrowers and 16% of pawnbrokers.
The CFPB concludes the report by observing that while relatively few consumers use AFS products, consumers who use these products do so repeatedly. The report includes additional details on AFS user demographics, financial shocks, and other available payment options.
While the data on which the report is based were collected by the Kraninger administration in June 2019 and June 2020 as part of the first two waves of the CFPB’s “Making Ends Meet” survey, they must nevertheless be placed in context. of Statements of March 23 by Acting Director Uejiot that the “great majority of [the small dollar lending] the industry’s revenue came from consumers who could not afford to repay their loans, with most of the short-term loans in loan chains of 10 or more “and that the CFPB is” keenly aware of the harm done to consumers in the small dollar loan market, and is particularly concerned with the business model of any lender that depends on the inability of consumers to repay their loans. “Therefore, despite the cancellation of the ‘repayment capacity’ provisions of the CFPB rule on ‘payday loans, vehicle title and certain high cost installment loans’, the report is another point. data indicating CFPB’s belief that “the damage identified by the 2017 rule still exists” and a warning to small lenders of its intention to remedy such damage “through monitoring, supervision, enforcement and, where appropriate , vigorous market regulation ”.