Study finds high default rates in payday lending

By Lydia Wheeler – 03/31/15 05:52 PM EDT

In studying payday loans in North Dakota, the Center for Responsible Lending found that nearly half of all borrowers default on a loan within their first two years of borrowing.

The number — 46 percent — is attributed to borrowers who took out multiple payday loans within that two-year period or renewed just one loan.

The CRL’s study, released Tuesday, goes on to say that of the 46 percent, half defaulted within the first two payday loans they borrowed. This, said Senior Policy Researcher Susanna Montezemolo, means borrowers are getting into trouble right away.

The report comes about a week after the Consumer Financial Protection Bureau released its framework for payday loan regulation, which proposed letting lenders chose between two different sets of rules. One would prevent the borrower from getting stuck in a debt trap by forcing lenders to determine a borrower’s ability to repay before issuing a loan. The other would protect lenders after they’ve taken out a payday loan from getting trapped in fees and being unable to pay off the loan if they defaulted.
Montezemolo said the CRL’s study supports arguments that the ability to repay standard loans should to be required for every payday loan.

“This report shows a high default rate on payday loans even though lenders are first in line to be paid — a clear sign that a borrower is unable to escape the debt trap once lured in by an initial payday loan,” she said.

The CRL used data from North Dakota because it has a database that tracks each borrower in the state.

“We have no reason to think North Dakota is any different from any other state that doesn’t regulate payday lenders,” Montezemolo said.

Not only do payment checks bounce, which is known as a visible default, the CRL said there are invisible ways borrowers can default on a payday loan. They occur when the check written to the payday lender goes through but results in an overdraft or non-sufficient funds fee. The CRL said invisible defaults, which one-third of all borrowers experience, mask the true default rate and make triple-digit interest rate loans even more expensive for consumers.