A new CIS paper revisits the viral exchange on payday loan rates by Katie Porter and Kathy Kraninger.
It’s not every day a exchange about a technical loan measure goes viral on social networks. At a 2019 House Financial Services Committee hearing, Representative Katie Porter (D-CA) urged Bureau of Consumer Financial Protection (CFPB) Director Kathy Kraninger to calculate the cost of a payday loan, using the federal government’s official annual percentage measure. rate (APR).
During her questioning, Representative Porter posed the hypothetical example of a single mother who hastily obtained a payday loan to fix her car so she could get to work on time. She took out a two-week $ 200 payday loan with an interest charge of $ 20 and a set-up fee of $ 20. After explaining the example, she asked Kraninger to calculate the APR on the loan. Kraninger replied that the hearing was meant to be “a political conversation” and “not a math exercise”. Porter interrupted Kraninger, saying she was “getting my time back,” before Kraninger had a chance to respond. The problem is, it was difficult for Kraninger to give a clear answer.
The APR is the mathematical calculation that adds the amount financed, interest, fees and payment schedule into the cost of credit expressed as an annual rate. Its disclosure is required by the laws that govern all types of loans, including those with terms of much less than one year.
However, as Matthew Adams and I point out in a new IEC paper, the RPA’s disclosure rules have led to a distorted view of short-term lending. According to the traditional formula for calculating the APR, the loan in the example of Porter’s representative would add up to a colossal amount. 520 percent interest rate. However, the single mother in question would only have had to pay 20% interest, or $ 40, if she had paid off the loan on time, within two weeks of the regular payday loan.
Hardly any of Kraninger’s critics asked how long it typically takes borrowers to repay these loans and what policymakers can do to align disclosure rules with what they actually pay. Adams and my article take a look at these vital questions and offer solutions to help foster a competitive market for short-term loans that can help struggling consumers. We hope you will enjoy and learn from it.