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Many payday loan borrowers are not using the cheapest repayment option in states where it’s available, perpetuating a cycle of high fees and debt, the Consumer Financial Protection Bureau said in a report Wednesday. .
In some cases, payday lenders hid information about these “no-fee extended repayment plans” from borrowers to generate more revenue, the federal agency said.
The Dodd-Frank Act created the CFPB in the wake of the Great Recession to protect consumers from unfair, abusive, and deceptive financial practices.
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“Our research suggests that state laws that require payday lenders to offer extended repayment plans at no cost are not working as intended,” office manager Rohit Chopra said in a written statement. “Payday lenders have a strong incentive to protect their income by encouraging borrowers to re-borrow in expensive ways.”
INFiN, a trade group that represents the consumer financial services industry, said its members work with customers who are having difficulty repaying their loan within an agreed time frame, to find the best way to help them repay.
“INFiN members work with each client to ensure they are borrowing loans that meet their needs and means, and help them become successful borrowers,” said Ed D’Alessio, group chief executive. .
Payday loans are generally short-term, high-cost loans repayable in one installment on the borrower’s next payday.
Such loans are permitted in 26 states and more than 12 million people borrow each year, according to the CFPB.
Rohit Chopra, director of the Consumer Financial Protection Bureau.
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The median payday loan is around $350 and typical fees add up to an average interest rate of 391%, according to the CFPB.
Those who cannot repay on time can pay a fee to extend their maturity via a “rollover”. Rollover costs do not count against the principal of the loan. Rollovers can be used to keep payday borrowers in debt, the CFPB said.
Sixteen states require lenders to offer “no-cost extended payment plans” as an alternative, the CFPB said. These plans allow borrowers to repay their loan in installments rather than a single installment, the CFPB said.
Here is a comparison of the two types of CFPB repayment options: Someone borrowing a typical $300 loan would pay $45 every two weeks to renew the loan; after four months, they would have paid $360 in rollover fees and still owe the original $300. If the same person initially chooses the no-fee payment plan, they will pay a total of $345 over that period.
But these payment plans have low usage in states where they are available, according to the report, which the CFPB says is the first to compare usage across states.
For example, utilization rates range from less than 1% of borrowers in Florida to 13.4% in Washington state, according to the report.
“Despite the prevalence of state laws providing no-fee extended payment plans, data shows that turnover and default rates consistently exceed extended payment plan utilization rates,” the agency wrote. “The Bureau observed that monetary incentives encourage lenders to promote higher cost rollovers at the expense of extended payment plans.”
D’Alessio said all INFiN members offer extended payment plans unless prohibited by state law, and options are disclosed and explained to customers in contracts and in person.
“We are committed to working with the CFPB and other state and federal regulators to ensure that every customer has a positive experience with our products, and not only are informed of their options like PPE, but take advantage of them to enable and enhance financial inclusion and stability,” D’Alessio said.