Payday lending loses favor among borrowers
Effects of pandemic might reverse trend, howeverNovember 5th, 2020
The popularity of payday lending in Washington state has been decreasing steadily, according to data released in August from the Washington state Department of Financial Institutions’ 2019 Payday Lending Report.
While the events of 2020 could reverse that trend, brick-and-mortar lenders here continue to face pressures from online payday lenders and a shifting regulatory landscape.
Data in the report shows the number of payday lenders in the state and the dollar volume of payday loans have both decreased by small amounts annually over the past 15 years, leading to a cumulative larger decrease. In 2019, 78 payday lender locations were licensed to operate in Washington. That’s down by just one location from 2018, but a decrease of 89.5% from 2006. Similarly, the dollar volume of loans decreased by 1.9% from 2018 to 2019, to $229 million, compared with a decrease of 83.3% in 2019 from peak volumes in 2005.
The state Department of Financial Institutions defines a payday loan as a small amount, short-term loan that a borrower typically repays either by providing a lender with direct access to a checking account or by writing a post-dated check for the loan amount plus a fee.
Sometimes, payday loans also are called cash advances or short-term loans. Washington consumers can borrow a maximum of $700, or 30% of their gross monthly income, whichever is less. Borrowers are limited to one loan at a time. According to the DFI report, the average customer makes about $3,480 per month, or just under $42,000 a year.
Cindy Fazio, director of the consumer services division of DFI, says she expects next year’s report will show a reversal of the trend as more consumers hurt financially by the pandemic seek payday loans.
“The onset of the pandemic is going to have a huge impact that we’re going to start to see beginning next year,” Fazio says.
While payday lenders could see higher rates of lending in the coming years, it may not be enough to offset some of the effects online lending has had to Washington’s payday lending industry. Fazio says it’s difficult to track the number of online lenders operating in the state, as well as whether those lenders are associated with state-licensed lenders, whether the lenders offer products that fall under the state’s consumer loan act, or whether a lender is unlicensed.
“We don’t have really good, concrete data on how many borrowers have turned to that vehicle, versus the more traditional payday lenders,” Fazio says. “The only way we know about those is when we get complaints from consumers.”
In 2019, DFI received 30 consumer complaints about payday lenders. Fazio says 17 complaints were against online payday lenders, and 15 of those 17 complaints were against unlicensed online lenders.
Small brick-and-mortar payday lenders in Washington are not as common as they once were, Fazio says.
Sofia Flores is the office manager at Cash Source, a trade name for Samca LLC, which also does business as Ace for Space self-storage and Super Wash laundromat, both in downtown Spokane. Cash Source is the only payday lender headquartered in Spokane, according to DFI.
Cash Source stopped issuing payday loans to new customers about two years ago, due partly to the high costs of doing business, including auditing costs and high default rates, Flores says.
“Washington state does a mandatory audit every three years, which we have to pay for,” she says. “Once we pay for that audit, we basically lose all our profits for that year, if not more.”
Whether Cash Source will stop issuing payday loans altogether depends on the cost of the next audit, Flores says.
“We’re not making much profit off of it,” she says.
The maximum fee a payday lender can charge in Washington state is $15 for every $100 loaned.
State law also limits payday lenders to a one-time fee of $25 for bounced checks on an individual loan regardless of how many checks bounce when a lender attempts to collect payment on it, she says.
Flores says a borrower who bounced three checks on repayment of a single payday loan — causing Cash Source to lose money due to returned check fees from its bank — was the last straw for accepting new payday loan borrowers.
“We were out a lot of money on that one,” Flores says. “That was my breaking point. I told my boss, ‘I don’t think we should do this anymore. It’s a losing business.’”
Because the self-storage facility portion of Samca LLC is popular, Flores says the company requested and was granted permission from the state to stop accepting new customers while continuing to loan to existing customers—a total of 10 to 15 borrowers.
According to the DFI report, there are two other payday lenders in the Spokane area, though the report doesn’t identify those companies. Flores says the only two other payday lenders in the Spokane area she knows of are Spartanburg, South Carolina-based Advance America, which has a location in Spokane Valley, and Seattle-based Moneytree, which has one location in Spokane Valley and one in north Spokane.
“Other than that, I don’t know anybody else who does them anymore,” Flores says. “A lot of those businesses have shut down. I would assume they probably shut down for the same reason that we’re not (accepting new payday loan customers) here — people aren’t paying back, and it’s hard to collect.”
Fazio says fewer payday loan outfits in Washington could lead some borrowers to look to banks and credit unions for short-term loans.
In recent years, federal agencies have been encouraging banks and credit unions to move into the short-term loan space. In mid-2018, the U.S. Department of the Treasury’s office of the comptroller of the currency issued a bulletin that encouraged banks to offer “responsible short-term, small-dollar installment loans, typically two to 12 months in duration” to help meet consumer demand. The bulletin replaced a 2013 notice which advised banks against small-dollar lending.
In October 2019, the National Credit Union Association published a rule that expanded its original Payday Alternative Loan program with a new program called PALs II. The expansion, which went into effect in December 2019, authorizes federal credit unions to offer small-dollar loans in larger amounts and for longer terms, removes membership tenure requirements, and limits credit unions to one type of a PAL loan at a time.
There are some signs that the encouragement could be working. In 2018, U.S. Bank began offering small-dollar loans called Simple Loan, with the express purpose of competing with payday lenders. Last month, Bank of America announced Balance Assist, a short-term, small-dollar loan program scheduled to launch beginning in January 2021.
More recently, there’s been some turbulence in federal rulemaking regarding payday loans that some consumer groups say puts borrowers at risk. On July 7, the Consumer Financial Protection Bureau revoked the mandatory underwriting provisions of the bureau’s 2017 rule governing payday, vehicle title, and certain high-cost installment loans.
The original rule, which had a compliance date of Aug. 19, 2019, determined that payday lenders had to establish up-front whether a borrower could afford to repay a loan before issuing the loan through an underwriting process similar to the process banks use in determining whether a borrower can afford a mortgage or other long-term loan. In effect, the rule banned lenders from issuing a payday loan that couldn’t be paid off fully by the borrower within two weeks.
Revoking the rule drew the ire of several consumer and lending groups, including the National Consumer Law Center, which alleges that the revocation of the rule shows that CFPB is failing to work in the best interests of borrowers.
“At this moment of health and economic crisis, the CFPB has callously embraced an industry that charges up to 400% annual interest and makes loans knowing they will put people in a debt trap,” said Lauren Saunders, associate director of the National Consumer Law Center.