TruStage: Predatory Lending in the Digital World – Using Data to Help Members
In an era dominated by digital advancements, the credit union industry may face a new and intricate battle against predatory lending. Drawing insights from actual credit union data, our goal is to shed light on the specific segments of members who are most susceptible to these lenders. Once credit unions know which members are most vulnerable, they could intervene with tailored product offerings designed to help prevent members from entering a payday lender cycle.
The Surge of Digital Predatory Lending without Regulation
The digital revolution is one of the causes of a surge in predatory lending. It has helped to create an environment where certain lenders might take advantage of gaps in regulation and consumer understanding. Practices such as high-interest payday loans, terms that could be confusing, and fees that aren't immediately apparent are among the methods employed by these lenders to attract borrowers. As an example, the annual percentage rate (APR) of a typical two-week payday loan with a $15 fee per $100 borrowed is 391%.1
The situation has become so severe that some U.S. states have enacted a 36% interest rate cap for payday lenders and 12 states have banned them altogether.2 Payday lenders have expressed concern that the cap will not permit them to continue conducting business in Minnesota, as an example, which they claim will encourage prospective borrowers to pursue loans via unregulated online marketplaces.2 However, research indicates a substantial decrease in payday loans and borrowers pursuing online loans within regulated states.2 Additionally, more than 80% of borrowers have expressed they would be more cautious with their expenses if payday loans weren’t available.2
Even with regulation in place, the magnitude of existing and estimated future payday lending growth is still prevalent. In 2021, the Payday Loans market had an estimated worth of approximately $33.5B and this is projected to increase to $42.6B by 2028.3
Shedding Light on Vulnerable Segments
With the shift to the digital realm, payday loan providers can now greatly expand their outreach, encompassing a wider range of consumers. It is more probable that low-income households and communities of color will be targeted by payday lenders.2 Vulnerable members may choose a payday loan over their credit union because they may feel embarrassed displaying their current financial situation. Beyond the emotional strain, members may turn to digital payday lenders because they feel it's their only option.
Thankfully, data has emerged as a powerful tool in the fight against predatory lending. By leveraging data analytics and technology, credit unions can gain valuable insights into their members' financial behaviors, helping enable them to identify signs of susceptibility to predatory lending and take proactive measures.
Strategies for Supporting Vulnerable Members
Credit unions can proactively identify members who could benefit from support by collaborating with them when they seek assistance. They can also explore opportunities by examining Automated Clearing House (ACH) deposits from payday lenders into members' accounts, with the members' consent. This isn't always one large deposit; it can be small deposits from multiple payday lenders. Once identified, credit unions can extend a helping hand by offering to help pay off the loans and get members into better financial security.
Through this approach, credit unions achieve two benefits. First, by helping members improve their financial situation, they may cultivate a sense of loyalty among members who develop a strong trust in their credit union. Second, they may enhance their earnings through increased interest generated by loan repayment products.
The Path Forward
The digital transformation of the lending landscape has great benefits, but it has also opened the door to predatory lending practices. Credit unions, with their member-centric approach, are well-positioned to leverage data to help protect their members from falling victim to predatory loans. By harnessing the power of data, credit unions may help identify signs of predatory lending and take proactive steps to educate, intervene and offer dignified financial services with members’ best interest in mind.
By Emily Nadboralski, Director of Data & Analytics, and Vicki Potter, Analytics Consultant, TruStage™
1 United States Federal Trade Commission, “What to Know About Payday and Car Title Loans”, July 2023
2 Minnesota Reformer, “Payday Loans Trap Minnesotans in a Cycle of Debt”, March 2023
3 Vantage Market Research, “2022 Statistics: Payday Loans Market Will Surpass USD 42.6 Billion at 4.1% CAGR Growth: Vantage Market Research”, May 2022
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