Yesterday (4/24/2013), the CFPB issued a 43-page white paper—in advance of a full report due later this spring—on payday and deposit advance loans, concluding these loans “raise substantial consumer protection concerns.” During its year-long investigation, the CFPB reviewed approximately 15 million loans from lenders in 33 states.  While Director Cordray acknowledged that the study found that payday loans “can be helpful” and “may work for some consumers for whom an expense needs to be deferred for a short period of time,” the study concluded that these loans and advances “may become harmful for consumers when they are used to make up for chronic cash flow shortages” and that “the high cost of the loan or advance may itself contribute to the chronic difficulty such consumers face in retiring the debt.” What is most remarkable about the report is not what says, but what it does not say: The report is devoid of any findings, much less a suggestion, that any payday lenders actually engaged in any improper practices. 

Of course, that did not stand in the way of the CFPB announcing that it “expects to use its authorities” to prescribe rules and “prevent covered persons or service providers from committing or engaging in [unlawful unfair, deceptive or abusive acts or practices].” While the report does not identify any possible rules the CFPB may adopt, consumer groups have long advocated for rules requiring lenders to confirm a borrower's ability to repay and/or “cooling off periods” or other limits on a consumer's ability to take out these loans. Essentially, protecting borrowers from themselves. There can also be little question that the CFPB also intends to “use its authorities” to examine and supervise payday lenders.

Despite purporting to be “comprehensive,” the CFPB’s concedes that its study does not analyze certain, important factors, including: (i) why the borrowers use payday loans, e.g. to pay for emergency expenses v. regular obligations; or (ii) whether there were other options available to borrowers, and the possible consequences or trade-offs associated with these choices. Thus, the CFPB’s reliance in this study in furtherance of any action is questionable. The CFPB also acknowledged that “[i]t is unclear whether consumers understand the costs, benefits, and risks of using these products.”

Regardless, Director Cordray declared that the CFPB’s “comprehensive study” found that “payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden.” This white paper is the opening volley in an effort by the CFPB and other regulators to impose tighter restrictions on the payday lending market.