Shift from payday lenders to installment loans increases risk, report says

Payday lenders are increasingly turning to installment loans to get ahead of federal regulations, creating new risks for borrowers, according to a new report.

The Consumer Financial Protection Bureau released a proposed rule in June aimed at curbing abusive practices in the payday industry. But if the rule is enacted in its current form, it would “accelerate the transition to installment lending[s]according to a report published Thursday by Pew Charitable Trusts, a public policy research group. The loans often have high interest rates and require borrowers to take out new loans to pay off old ones, the same onerous features that have accompanied payday loans.

The report is notable because Pew is generally an advocate of the CFPB’s efforts. But the research group slammed the regulator on a call discussing its report with reporters.

If passed in its current version, “the net effect goes from 400% APR for two-week loans to 400% APR for installment loans,” said Nick Bourke, project manager at Pew. “The CFPB should do more to ensure that installment loans are safer and more affordable.”

A CFPB spokesperson said the proposed rule would require lenders to “reasonably determine whether a consumer will have the ability to repay.” This includes whether the borrower can repay the loan without having to take out another soon after. He said the rule sets out a specific methodology for lenders to use. The CFPB invites comments until October 7th. There is no official estimate as to when a final rule will be announced.

Installment loan volume surged The Wall Street Journal reported this week. This is believed to be partly due to efforts by payday lenders to anticipate the new rules.

Lenders issued nearly $24.2 billion in installment loans to borrowers with credit scores of 660 or lower in 2015. This represents a 78% increase over the previous year and nearly triple the 2012 amount, based on loan data submitted by primarily non-bank lenders for credit reporting. Experian firm.

The CFPB’s proposed rule requires payday lenders and many installment lenders to ensure applicants have the ability to repay their loans after covering major obligations, such as housing costs. This requirement is much more difficult for payday loans, as they generally require a lump sum payment.

Installment loans are supposed to be safer for borrowers because they spread out repayments over a long period, unlike payday loans, which require payment in full within a few weeks. But installment loans also have large monthly payments, as lenders roll out larger loans with three-digit annual percentage rates for periods that often last a year or more. High interest charges mean that a very small portion of each payment is actually used to reduce the loan balance.

Payday lenders issue installment loans or lines of credit in 26 of the 39 states in which they operate with APRs often ranging from 200% to 600%, according to the Pew report.

In California, a state regulator says it is finding evidence that installment lenders are steering borrowers toward triple-digit APR loans. The state has a 36% APR cap for loans under $2,500, but no cap for larger loans. Lenders issued more than 500,000 installment loans between $2,500 and $4,999 last year – the highest amount of any loan size category – and more than half had APRs of at least 100%, according to the state’s Department of Business Oversight.

The Pew report says many installment lenders charge high upfront fees to make the loans and encourage borrowers to refinance to charge more of those fees. The fee can be around 10% of the loan amount.

Write to AnnaMaria Andriotis at [email protected]

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Thelma J. Longworth