Wednesday, June 29 2022

Payday loans are small cash advances that typically mature in a single payment on the borrower’s next payday – they are extremely short-term and generally high-interest forms of consumer credit.[1] If the borrower is unable to repay the loan when it is due, some states allow the borrower to pay a fee to defer full loan repayment or to extend their loan. A 2014 Consumer Financial Protection Bureau (CFPB) report found that over 80% of payday loans are rolled over within two weeks.[2]

The CFPB notes that more than 12 million borrowers take out payday loans each year.[3] 16 states now require payday loans to allow borrowers to repay their payday loans at regular intervals through Extended Payment Plans (EPPs), typically at no additional cost to the borrower.[4]

On April 6, 2022, the CFPB released a report examining government EPPs.[5] Below are some of the key findings from the CFPB report.

Divergences and similarities between state EPP laws

The CFPB report found “significant differences” between state EVPs, particularly in consumer eligibility requirements.[6] Depending on the state in which they borrow, consumers can become EPP-eligible after exceeding a set number of renewals, paying a certain percentage of the outstanding balance, or checking in with a credit counselor.

Most states require EPPs to contain at least four equal or substantially equal installments, and consumers are typically limited to one EPP choice in any 12-month period. Many states require lenders to disclose the availability of an EPP option to consumers at the time of inception of the payday loan agreement or at the time of default.

EPP usage, standard and rollover rates

According to the CFPB report, utilization rates for enhanced payment plans vary drastically between states, with Washington reporting that 13.4% of payday loans converted to EPPs in 2020 compared to 0.4% in Florida. In California, EPP utilization rates doubled from 1.2% in 2019 to 3.0% in 2020. While the COVID-19 pandemic caused payday loan volume to fall by 65%, EPP utilization rates tended to increase slightly . The report attributes the decline in overall payday loan volume to federal economic impact payments.

Meanwhile, rollover and failure rates still remain higher than EPP usage rates. For example, 27% of payday borrowers in Washington defaulted on their loan in 2020, and 47.1% of borrowers in Idaho extended their loan in 2016. In the report’s press release, CFPB Director Rohit Chopra acknowledged that “[p]Day lenders have a strong incentive to protect their earnings by directing borrowers into costly re-indebtedness, causing “state laws that require payday lenders to offer no-charge extended repayment plans [to] not working[] as intended.”[7]

* * *

Embedded throughout the report is the CFPB’s clear preference for expanded EPP opportunities to prevent consumers from charging repeat rollover fees. In 2014, the CFPB reported that most borrowers roll over their payday loans so many times that the accumulated rollover fees exceed the original loan amount.[8] Lenders should note that the CFPB “will continue to monitor lender practices that discourage consumers from entering into enhanced payment plans and will take action as appropriate.”[9]

[1] Payday loans are only legal in 26 states: Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nevada, North Dakota, Rhode Island, South Carolina , Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming.

[2] CFPB notes that four out of five payday loans are rolled over or extendedCFPB (March 25, 2014).

[3] CFPB notes that despite government protections and payment schedules, payday borrowers continue to pay significant rollover feesCFPB (06.04.2022).

[4] Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Louisiana, Michigan, Nevada, South Carolina, Utah, Washington, Wisconsin and Wyoming.

[5] Market Snapshot: Consumer Use of Enhanced Payment Plans for Government Payday LoansConsumer Finance Protection Bureau (April 2022).

[6] ID. at 5, 7.

[7] CFPB notes that despite government protections and payment schedules, payday borrowers continue to pay significant rollover fees, above note 3

[8] CFPB data point: Payday LoansCFPB (March 2014).

[9] Market Snapshot, above Grade 5, at 14.

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