ASFA Responds to New CRL Report on Installment Loans | Ballard Spahr LLP
On July 28, the Center for Responsible Lenders (CRL) released a new one report referring to the “continuing damage caused by expensive installment loans” and claims that such loans come with “exploitative costs” in the form of fees and interest that far exceed the amount borrowed, often causing irreparable damage to borrowers. CRL notes that the recent emergence in the high-rate small dollar loan market is high-rate installment loans with atypically longer terms, typically over a period of several months, as opposed to traditional payday loans, which typically mature in a lump sum within a fortnight.
CRL is concerned about the proliferation of these longer-term loans because they have characteristics similar to other payday and auto title loans, including lack of underwriting, access to a borrower’s bank account or vehicle as collateral, “structures” that make borrowers more difficult to repay Interest rates and fees and a tendency to shift credit or stressed new borrowing. CRL concludes that borrowers cannot afford to repay these loans, whether structured as installment or balloon payment loans.
The data used in the report was collected through an online survey of 1,000 adults who took out at least one expensive personal loan in 2019, 2020, or 2021, with samples of 100 Black adults and 100 Latino adults who took out such loans. In addition to the survey, CRL conducted two virtual focus groups with high-priced consumer loan borrowers. The prerequisite for inclusion in the focus groups was taking out a high-priced installment loan with terms of more than two months in 2019, 2020 or 2021.
Findings included in the CRL report include:
(1) Unfavorable conditions for high-priced installment loans meant that most loans were refinanced at least once. For the significant proportion of borrowers surveyed who missed or delayed their loan payments, the consequences were severe.
(2) The strain of repaying high-priced loans often caused borrowers to miss payments on other obligations, leading to additional debt or a larger fiscal deficit — exacerbating rather than alleviating existing financial problems.
(3) Borrowers understood that these loans were damaging their creditworthiness and delaying wealth-building activities such as buying a home or car, investing in a business, or saving for retirement, but circumstances led them to believe that they did not had other option to fall short -term financial need.
The American Financial Services Association (ASFA) answered on the CRL report, noting that CRL separates traditional installment lenders (TILs) and other non-payday, non-autotitle lenders into a single category called “expensive installment lenders.” By “deceptively lumping all forms of installment lenders under one roof,” ASFA argues that CRL is causing confusion among both policymakers and consumers, despite CRL’s claims that these loans share characteristics similar to other payday and auto title loans , just isn’t the case for TILs. According to AFSA, unlike these loans, TIL lenders underwrite and assess customer solvency; they do not need access to customers’ bank accounts; The terms are clear, with standard monthly payments, no hidden fees, no balloon payments or penalties for early repayments and reporting to credit bureaus.”
ASFA also notes, contrary to CRL’s assertion, that there is ample research on the “impact of predatory lending on consumer financial standing and the benefits of responsible small dollar lending to consumers, particularly those with subprime credit ratings” and that CRLs “Fallback policy of imposing interest rate caps to protect consumers” is impractical and will lead to the proliferation of the predatory lenders that CRL is targeting.