How One State Succeeded in Restricting Payday Loans

Lenders Reaped a Majority of Their Fees From a Minority of Repeat Borrowers

Two-thirds of borrowers in 2009 took out eight or fewer loans…

Total Borrowers, by number of loans in 2009

At least in Washington, most payday loan borrowers didn’t take out eight
loans in a year. Data from 2009, the last year before the reform bill went into effect, shows how many people in 2009 took out one to
four loans, five to eight loans, and so on. Two-thirds of these borrowers took
out eight or fewer loans in 2009.

But the people who take out only a few payday loans do not drive
industry profits. That becomes clear when, instead of looking at the number of
people, one looks at the number of loans. Then the trend flips: About
two-thirds of loans went to borrowers who took out nine or more loans in 2009.

In other words, one-third of payday loan borrowers accounted for
two-thirds of payday loans made in Washington State in
2009.

The Consumer Financial Protection Bureau found a similar imbalance when
it studied
a national sample of payday loans earlier this year: Lenders reaped three-quarters
of their loan fees from borrowers who had more than 10 payday loans in a
12-month period.

As expected, Washington’s reform has not affected most borrowers.
According to the 2011 report from state regulators, only about 24 percent of
borrowers had taken out the maximum eight loans over a 12-month period.

But the total number of payday loans has plummeted. In 2009, Washington
borrowers took out more than 3.2 million payday loans. In 2011, the last year
for which data is available, the number had plunged to 856,000.

During the same time, the number of payday loan stores in the state
dropped by 42 percent.

The law “worked way better than we expected,” said Marcy Bowers,
director of the nonprofit Statewide Poverty Action Network.

Meanwhile, the industry, which opposed the 2009 law, has recently
pushed legislation to allow high-cost installment loans in the state. As we
report, that’s a typical response by the industry to unwanted
legislation.

Washington’s law has proven a model for other states. Delaware passed a
law in 2012 that limited payday loans to five in a 12-month period. Earlier
this year, consumer advocates pushed a similar law in California, but it
stalled.

Asked for comment about Washington’s law, Amy Cantu, a spokeswoman for
the Community Financial Services Association, the payday lenders’ trade group,
said lenders work closely with state regulators and cited the group’s best
practices, which include offering customers a payment plan when they want
more time to repay a loan.