Defending Payday Loans with Data

Anyone who has been following the news lately is likely under the misimpression that payday loans are on death's doorstep — soon to be felled by a regulatory crackdown or drummed out of business due to plummeting popularity.

But a plethora of new studies and reports released by regulators and researchers tell a story that contradicts common criticisms of the payday lending industry. Moreover, millions of Americans rely on payday loans to meet their short-term credit needs. Those needs would not disappear if payday loans were eradicated.

The Consumer Financial Protection Bureau recently released an analysis of the complaints it has received directly from consumers in its first three years. The analysis revealed that roughly 1% of the consumer complaints are related to payday loans. This is dwarfed by the number of complaints related to mortgages, debt collection and credit cards, which make up more than two-thirds of the total complaint volume.

The CFPB's data is not an outlier. It reflects the Federal Trade Commission's complaint data from 2013, in which payday loans made up less than 1% of more than two million complaints collected.

Additional research from the CFPB suggests that annual percentage rates are a misleading way to measure the affordability of a short-term loan.The research looks at consumers' use of overdraft protection — a short-term credit product that often serves as an alternative to payday loans. The report notes that an overdraft "loan" can have an APR of 17,000%. By comparison, a two-week payday loan for $100, with an additional cost of $15, has an implied APR of 391%. However, the real point is that neither of these annualized rates should be applicable to short-term transactions. Small-dollar loans for a short-term duration will always add up to a shockingly large APR, but this alone tells us little or nothing about their true cost or value.

Short-term borrowers also overwhelmingly prefer finance charges in simple dollar amounts as opposed to APRs, according to recent research by the Federal Reserve's Thomas Durkin and Gregory Elliehausen. The overriding reason: using dollars makes it easier for people to make a quick judgment about how much a loan will cost and whether it is affordable. In short, it's more practical.

The Community Financial Services Association of America and its nonbank lender members continue to work to close the knowledge gap regarding the use of payday loans and the impact on a borrower's financial welfare. In July, CFSA's five largest member companies delivered the largest and most comprehensive set of borrower transaction data ever — more than 100 million records — to a third-party repository for the CFPB and other researchers to analyze. This will provide a critical missing piece to the policy debate surrounding payday loans, as many critics presume the loans harm consumers but lack empirically-sound evidence to support such a conclusion. The data our members have delivered will allow policymakers and researchers to drill down on this important question.

The CFPB has always maintained that it is "data-driven." We hope this newly-available data, combined with the aforementioned reports, will guide the agency's federal rulemaking for short-term credit.

The bottom line is that the available data suggests that payday loan borrowers understand the cost and terms of their loan and use it as intended. However, there is still enormous opportunity for the financial services industry to better serve all consumers' credit needs. We must continue working to develop and improve credit products for consumers who may benefit more from longer-term options than a traditional two-week payday loan. Policymakers and industry members should work together on this effort while preserving existing products that seemingly work well for the great majority of Americans.

Dennis Shaul is the chief executive of the Community Financial Services Association of America, which represents nonbank lenders. He previously served as a senior advisor to former Representative Barney Frank and as a professional staff member of the House Financial Services Committee.