WASHINGTON–With the Consumer Financial Protection Bureau expected today to adopt a final rule on prepaid cards and to close the public comment period for its proposed rule on payday lending on Oct. 7, the Pew Charitable Trusts’ has released a compilation of its findings and conclusions around both issues.
Pew said it has been researching both prepaid cards and payday lending since 2011.
Among its findings and views:
Prepaid Cards
Pew said it has strongly supported clearer consumer disclosures, restrictions on overdrafts tied to prepaid cards, and expanded liability and theft protections. In addition, below are facts about prepaid cards from key findings in Pew’s report, Banking on Prepaid.
The report noted that:
- Prepaid card use is becoming more common. Prepaid card use jumped more than 50% between 2012 and 2014, driven primarily by increased adoption among consumers with bank accounts, with approximately 23 million U.S. adults regularly using prepaid cards, Pew said.
- Most prepaid card users do not want the option to overdraw their accounts. Seventy-two percent of unbanked and 45% of those with bank accounts say they use prepaid cards to avoid overdraft fees. Eighty-six percent of unbanked card users and 81% of those with bank accounts would rather have a transaction declined than pay a $35 overdraft fee.
- Unbanked prepaid cardholders use their prepaid cards more like traditional checking accounts and to manage their budgets. Pew said it found the unbanked, half of whom make less than $25,000 a year, check their balances more regularly, reload more frequently, and register their cards more often than banked cardholders do.
Payday Loans
Pew noted it recently posted a summary of the CFPB’s proposed rule and an analysis of the proposed rule’s impact. Below are excerpts from Pew’s “fast facts” fact sheet on payday lending, published earlier this year.
- Most borrowers pay more in fees than they originally received in credit. The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375. The average fee at a storefront loan business is $55 per two weeks. A borrower must have a checking account and income to get a payday loan. Average borrowers earn about $30,000 per year, and 58% have trouble meeting their monthly expenses.
- Payday loans are unaffordable for most borrowers. The average payday loan requires a lump-sum repayment of $430 on the next payday, consuming 36% of an average borrower’s gross paycheck. However, research shows that most borrowers can afford no more than 5% while still covering basic expenses.
- CFPB’s proposal will help, but it needs to be strengthened. According to Pew, borrowers overwhelmingly want reform, with eight in ten favoring requirements that payments take up only a small amount of each paycheck and that borrowers be given more time to repay their loans. The CFPB’s proposal will set a new national minimum safety standard. But high-interest payday and auto title loans will continue to exist where permitted by state law. Pew said its position is the safest loans would be those that follow national credit union guidelines or that limit payments to 5% of income, and loan duration to six months. These rules would provide a pathway for banks and credit unions to offer customers lower-cost installment loans.