New CEI Paper Revisits Viral Exchange on Payday Loan Rates by Katie Porter and Kathy Kraninger.

It’s not every day an exchange about a technical measurement for loans goes viral on social media. During a 2019 House Committee on Financial Services hearing, Rep. Katie Porter (D-CA) pressed then-Consumer Financial Protection Bureau (CFPB) Director Kathy Kraninger to calculate the cost of a payday loan, using the federal government’s official measure of annual percentage rate (APR).

During her questioning, Rep. Porter posed the hypothetical example of a single mother who had 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 a $20 interest charge and a $20 origination fee. After explaining the example, she asked Kraninger to calculate the APR of the loan. Kraninger replied that the hearing was supposed to be “a policy conversation” and “not a math exercise.” Porter cut off Kraninger, saying she was “reclaiming my time,” before Kraninger had a chance to answer. The problem is that it was difficult for Kraninger to give a clear answer.

APR is the mathematical calculation that adds up the amount financed, interest, fees, and payment schedule into the cost of credit expressed as a yearly rate. Its disclosure is required by laws that govern all types of loans, including those with durations of much less than a year.

However, as Matthew Adams and I point out in a new CEI paper, APR disclosure rules have led to a distorted view of short-term lending. Under the traditional formula for calculating APR, the loan in Rep. Porter’s example would total a colossal 520 percent interest rate. However, the single mother in question would only have had to pay 20 percent interest, or $40, if she paid back the loan on time, within the two-week duration of the typical payday loan.

Hardly any of Kraninger’s critics were asking how long it typically takes borrowers to pay off these loans and what polic ymakers can do to align disclosure rules with what they actually pay. Adams’s and my paper looks at those vital questions and proposes solutions to help foster a competitive market in short-term lending that can help struggling consumers. We hope you enjoy and get some insights from it.