CFPB says payday lenders steer customers from no-cost payment plans

The Consumer Financial Protection Bureau has set its sights on payday lenders who steer borrowers into costly rollovers rather than no-fee alternatives.

In a report released Wednesday, the CFPB said its research suggests that payday lenders are engaging in “deceptive" practices by driving borrowers to repeatedly roll over their loans, which comes with a cost, rather than providing a no-cost extended payment plan.

The CFPB said payday lenders profit from keeping borrowers in the dark about such plans, which 16 states either allow or require the industry to offer.

“Our research suggests that state laws that require payday lenders to offer no-cost extended repayment plans are not working as intended,” CFPB Director Rohit Chopra said in a press release. “Payday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing.”

The report is the first indication of how the CFPB under Chopra might confront payday lenders. In 2020, then-CFPB Director Kathy Kraninger rescinded the bureau’s payday lending rule by eliminating underwriting requirements for small-dollar loans.

For more than a decade, the payday industry has said that it follows "best practices," including by offering extended payment plans to customers who cannot repay their loans in two weeks.

The InFin Alliance, a payday loan trade group, said Wednesday that its members "are required to offer extended payment plans and they do so."

Ed D’Alessio, the industry group's executive, said the CFPB's report looked at a handful of states that provide usage rates on extended payment plans, but that the bureau did not attribute low participation in such plans to lender activity.

He also said that his group is committed to working with regulators to ensure that customers are informed of their options.

"If a customer experiences difficulty paying back a loan within the arranged timeframe, members work with them to find the best way to deal with their individual situation and to repay the loan," D'Alessio said.

A borrower pays roughly $45 in rollover fees every two weeks on a typical $300 loan until they can pay off the principal and fees, the CFPB said.

The bureau found that rollover rates and default rates consistently exceed the use of no-cost extended payment plans, despite state laws urging their use to help borrowers avoid paying significant fees.

The bureau cited its previous 2014 research, which found that most payday loans were made to borrowers who repeatedly rolled over their loans, often accruing fees far greater than the original loan amount.

And the CFPB cited past supervisory work that found some payday lenders have deceived struggling borrowers by misrepresenting or withholding information about their payment options.

State eligibility requirements for extended payment plans vary dramatically. For example, Florida consumers must enroll in credit counseling to be eligible for an extended payment plan. Fewer than 1% of Florida payday loan customers tapped the plans in 2020.

By contrast, 13% of payday borrowers in Washington state used extended payment plans the same year.

Under Chopra, the CFPB is expected to use its enforcement authority under the Dodd-Frank Act to punish payday lenders that violate the federal prohibition on “unfair, deceptive or abusive acts or practices.”