ASFA Responds to New CRL Report on Installment Loans | Ballard Spahr LLP
On July 28, the Center for Responsible Lender (CRL) published a new report regarding the “persistent damages of high-cost installment loans,” claiming that such loans come with an “operating cost” in fees and interest that far exceeds the amount borrowed, often causing irreparable harm to borrowers. CRL notes that the high-cost low-cost loan market has recently seen the rise of high-cost installment loans with atypically longer terms, typically over a period of months, unlike traditional payday loans, which are typically due at once. sum within fourteen days.
CRL is concerned about the increase in these longer-term loans because they have similar characteristics to other payday loans and car titles, including lack of underwriting, access to bank account or vehicle a borrower as collateral, “structures” that make it difficult for borrowers to repay, excessive rates and fees, and a tendency towards loan reversal or stressed reborrowing. CRL concludes that borrowers cannot afford to repay these loans, whether they are structured as an installment or lump sum loan.
The data used in the report was collected via an online survey of 1,000 adults who took out at least one high-cost personal loan in 2019, 2020, or 2021, with samples of 100 black adults and 100 Latino adults who took out high-cost personal loans. such loans. . In addition to the survey, CRL hosted two virtual focus groups with high-cost installment loan borrowers. To be eligible for inclusion in the focus groups, participants had to have taken out a high-cost installment loan, with terms longer than two months in 2019, 2020 or 2021.
Among other things, the CRL report includes the following findings:
(1) Adverse terms of high-cost installment loans led most loans to be refinanced at least once. For the significant share of borrowers surveyed who have missed or made late payments on their loans, the consequences have been severe.
(2) The burden of repaying high-cost loans often caused borrowers to default on other obligations, resulting in additional debt or a greater financial deficit, aggravating rather than alleviating pre-existing financial difficulties.
(3) Borrowers understood that these loans hurt their credit rating and delayed wealth-building activities such as buying a house or car, investing in a business, or saving money. retirement, but circumstances led them to believe they had no other option to cope with in the short term. -term financial needs.
The American Financial Services Association (ASFA) replied to the CRL report, noting that the CRL groups traditional installment lenders (TILs) and other lenders of titles other than payday and auto into a single category identified as “high-cost installment lenders.” By “misleadingly grouping all forms of installment lenders under one umbrella”, ASFA argues that CRL is confusing both policymakers and consumers because, despite CRL’s assertion that these loans share similar characteristics with other payday and car title loans, it simply isn’t. for TILs. According to the AFSA, unlike these loans, TIL lenders “underwrite and assess customers’ ability to pay; they do not need to access customers’ bank accounts; the terms are clear, with standard monthly payments, no hidden fees, no lump sum payments or prepayment penalties, and credit bureau reporting. »
ASFA also notes, contrary to CRL’s assertion, that there is a great deal of research on the “effects of predatory lending on consumers’ financial status and the benefits of responsible small-dollar lending to consumers, particularly those who have subprime credit ratings” and that CRL’s “fallback policy of imposing interest rate caps to protect consumers” is unworkable and will lead to the proliferation of predatory lenders that CRL opposes.