# Payday, Vehicle Title, and Certain High-Cost Installment Loans

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-13490

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 22, 2016
- **Citation:** 81 FR 47864

## Text

BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1041
[Docket No. CFPB-2016-0025]
RIN 3170-AA40
Payday, Vehicle Title, and Certain High-Cost Installment Loans

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Proposed rule with request for public comment.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau or CFPB) is proposing to establish 12 CFR 1041, which would contain regulations creating consumer protections for certain consumer credit products. The proposed regulations would cover payday, vehicle title, and certain high-cost installment loans.

DATES:

Comments must be received on or before October 7, 2016.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2016-0025 or RIN 3170-AA40, by any of the following methods:

•
Email: FederalRegisterComments@cfpb.gov
. Include Docket No. CFPB-2016-0025 or RIN 3170-AA40 in the subject line of the email.

•
Electronic: http://www.regulations.gov
. Follow the instructions for submitting comments.

•
Mail:
Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 20552.

•
Hand Delivery/Courier:
Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street NE., Washington, DC 20002.

Instructions:
All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to
http://www.regulations.gov
. In addition, comments will be available for public inspection and copying at 1275 First Street NE., Washington, DC 20002, on official business days between the hours of 10 a.m. and 5 p.m. eastern time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or Social Security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Eleanor Blume, Sarita Frattaroli, Casey Jennings, Sandeep Vaheesan, Steve Wrone, Counsels; Daniel C. Brown, Mark Morelli, Michael G. Silver, Laura B. Stack, Senior Counsels, Office of Regulations, at 202-435-7700.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

The Bureau is issuing this notice to propose consumer protections for payday loans, vehicle title loans, and certain high-cost installment loans (collectively “covered loans”). Covered loans are typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses. The Bureau has conducted extensive research on these products, in addition to several years of outreach and review of the available literature. The Bureau is proposing to issue regulations primarily pursuant to authority under section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to identify and prevent unfair, deceptive, and abusive acts and practices.
1

The Bureau is also using authorities under section 1022 of the Dodd-Frank Act to prescribe rules and make exemptions from such rules as is necessary or appropriate to carry out the purposes and objectives of the consumer Federal consumer financial laws,
2

section 1024 of the Dodd-Frank Act to facilitate supervision of certain non-bank financial service providers,
3

and section 1032 of the Dodd-Frank Act to require disclosures to convey the costs, benefits, and risks of particular consumer financial products or services.
4

1
Public Law 111-203, section 1031(b), 124 Stat. 1376 (2010) (hereinafter Dodd-Frank Act).

2
Dodd-Frank Act section 1022(b).

3
Dodd-Frank Act section 1024(b)(7).

4
Dodd-Frank Act section 1032(a).

The Bureau is concerned that lenders that make covered loans have developed business models that deviate substantially from the practices in other credit markets by failing to assess consumers' ability to repay their loans and by engaging in harmful practices in the course of seeking to withdraw payments from consumers' accounts. The Bureau believes that there may be a high likelihood of consumer harm in connection with these covered loans because many consumers struggle to repay their loans. In particular, many consumers who take out covered loans appear to lack the ability to repay them and face one of three options when an unaffordable loan payment is due: take out additional covered loans, default on the covered loan, or make the payment on the covered loan and fail to meet other major financial obligations or basic living expenses. Many lenders may seek to obtain repayment of covered loans directly from consumers' accounts. The Bureau is concerned that consumers may be subject to multiple fees and other harms when lenders make repeated unsuccessful attempts to withdraw funds from consumers' accounts.

A. Scope of the Proposed Rule

The Bureau's proposal would apply to two types of covered loans. First, it would apply to short-term loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms. Second, the proposal would apply to longer-term loans with terms of more than 45 days that have (1) a total cost of credit that exceeds 36 percent; and (2) either a lien or other security interest in the consumer's vehicle or a form of “leveraged payment mechanism” that gives the lender a right to initiate transfers from the consumer's account or to obtain payment through a payroll deduction or other direct access to the consumer's paycheck. Included among covered longer-term loans is a subcategory loans with a balloon payment, which require the consumer to pay all of the principal in a single payment or make at least one payment that is more than twice as large as any other payment.

The Bureau is proposing to exclude several types of consumer credit from the scope of the proposal, including: (1) Loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and lines of credit.

B. Proposed Ability-to-Repay Requirements and Alternative Requirements for Covered Short-Term Loans

The proposed rule would identify it as an abusive and unfair practice for a lender to make a covered short-term loan without reasonably determining that the consumer will have the ability

to repay the loan.
5

The proposed rule would prescribe requirements to prevent the practice. A lender, before making a covered short-term loan, would have to make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer's other major financial obligations and basic living expenses without needing to reborrow over the ensuing 30 days. Specifically, a lender would have to:

5
This is a notice of proposed rulemaking, so the Bureau's statements herein regarding this and other proposed identifications of unfair and abusive practices, including the necessary elements of such identifications, are provisional only. The Bureau is not herein finding that such elements have been satisfied and identifying unfair and abusive practices.

• Verify the consumer's net income;

• verify the consumer's debt obligations using a national consumer report and a consumer report from a “registered information system” as described below;

• verify the consumer's housing costs or use a reliable method of estimating a consumer's housing expense based on the housing expenses of similarly situated consumers;

• forecast a reasonable amount of basic living expenses for the consumer—expenditures (other than debt obligations and housing costs) necessary for a consumer to maintain the consumer's health, welfare, and ability to produce income;

• project the consumer's net income, debt obligations, and housing costs for a period of time based on the term of the loan; and

• determine the consumer's ability to repay the loan based on the lender's projections of the consumer's income, debt obligations, and housing costs and forecast of basic living expenses for the consumer.

A lender would also have to make, under certain circumstances, additional assumptions or presumptions when evaluating a consumer's ability to repay a covered short-term loan. The proposal would specify certain assumptions for determining the consumer's ability to repay a line of credit that is a covered short-term loan. In addition, if a consumer seeks a covered short-term loan within 30 days of a covered short-term loan or a covered longer-term loan with a balloon payment, a lender generally would be required to presume that the consumer is not able to afford the new loan. A lender would be able to overcome the presumption of unaffordability for a new covered short-term loan only if it could document a sufficient improvement in the consumer's financial capacity. Furthermore, a lender would be prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term loans within 30 days of each other.

A lender would also be allowed to make a covered short-term loan, without making an ability-to-repay determination, so long as the loan satisfies certain prescribed terms and the lender confirms that the consumer met specified borrowing history conditions and provides required disclosures to the consumer. Among other conditions, a lender would be allowed to make up to three covered short-term loans in short succession, provided that the first loan has a principal amount no larger than $500, the second loan has a principal amount at least one-third smaller than the principal amount on the first loan, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan. In addition, a lender would not be allowed to make a covered short-term loan under the alternative requirements if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. A lender would not be permitted to take vehicle security in connection with these loans.

C. Proposed Ability-to-Repay Requirements and Alternative Requirements for Covered Longer-Term Loans

The proposed rule would identify it as an abusive and unfair practice for a lender to make a covered longer-term loan without reasonably determining that the consumer will have the ability to repay the loan. The proposed rule would prescribe requirements to prevent the practice. A lender, before making a covered longer-term loan, would have to make a reasonable determination that the consumer has the ability to make all required payments as scheduled. The proposed ability-to-repay requirements for covered longer-term loans closely track the proposed requirements for covered short-term loans with an added requirement that the lender, in assessing the consumer's ability to repay a longer term loan, reasonably account for the possibility of volatility in the consumer's income, obligations, or basic living expenses during the term of the loan.

A lender would also have to make, under certain circumstances, additional assumptions or presumptions when evaluating a consumer's ability to repay a covered longer-term loan. The proposal would specify certain assumptions for determining the consumer's ability to repay a line of credit that is a covered longer-term loan. In addition, if a consumer seeks a covered longer-term loan within 30 days of a covered short-term loan or a covered longer-term balloon-payment loan, the lender would, under certain circumstances, be required to presume that the consumer is not able to afford a new loan. A presumption of unaffordability also generally would apply if the consumer has shown or expressed difficulty in repaying other outstanding covered or non-covered loans made by the same lender or its affiliate. A lender would be able to overcome the presumption of unaffordability for a new covered longer-term loan only if it could document a sufficient improvement in the consumer's financial capacity.

A lender would also be permitted to make a covered longer-term loan without having to satisfy the ability-to-repay requirements by making loans under a conditional exemption modeled on the National Credit Union Administration's (NCUA) Payday Alternative Loan (PAL) program. Among other conditions, a covered longer-term loan under this exemption would be required to have a principal amount of not less than $200 and not more than $1,000, fully amortizing payments, and a term of at least 46 days but not longer than six months. In addition, loans made under this exemption could not have an interest rate more that is more than the interest rate that is permitted for Federal credit unions to charge under the PAL regulations and an application fee of more than $20.

A lender would also be permitted to make a covered longer-term loan, without having to satisfy the ability-to-repay requirements, so long as the covered longer-term loan meets certain structural conditions. Among other conditions, a covered longer-term loan under this exemption would be required to have fully amortizing payments and a term of at least 46 days but not longer than 24 months. In addition, to qualify for this conditional exemption, a loan must carry a modified total cost of credit of less than or equal to an annual rate of 36 percent, from which the lender could exclude a single origination fee that is no more than $50 or that is reasonably proportionate to the lender's costs of underwriting. The projected annual default rate on all loans made pursuant to this conditional exemption must not exceed 5 percent. The lender would have to refund all of the origination fees paid by all borrowers in

any year in which the annual default rate of 5 percent is exceeded.

D. Proposed Payments Practices Rules

The proposed rule would identify it as an abusive and unfair practice for a lender to attempt to withdraw payment from a consumer's account in connection with a covered loan after the lender's second consecutive attempt to withdraw payment from the account has failed due to a lack of sufficient funds, unless the lender obtains from the consumer a new and specific authorization to make further withdrawals from the account. This prohibition on further withdrawal attempts would apply whether the two failed attempts are initiated through a single payment channel or different channels, such as the automated clearinghouse system and the check network. The proposed rule would require that lenders provide notice to consumers when the prohibition has been triggered and follow certain procedures in obtaining new authorizations.

In addition to the requirements related to the prohibition on further payment withdrawal attempts, a lender would be required to provide a written notice at least three business days before each attempt to withdraw payment for a covered loan from a consumer's checking, savings, or prepaid account. The notice would contain key information about the upcoming payment attempt, and, if applicable, alert the consumer to unusual payment attempts. A lender would be permitted to provide electronic notices so long as the consumer consents to electronic communications.

E. Additional Requirements

The Bureau is proposing to require lenders to furnish to registered information systems basic information for most covered loans at origination, any updates to that information over the life of the loan, and certain information when the loan ceases to be outstanding. The registered information systems would have to meet certain eligibility criteria prescribed in the proposed rule. The Bureau is proposing a sequential process that it believes would ensure that information systems would be registered and lenders ready to furnish at the time the furnishing obligation in the proposed rule would take effect. For most covered loans, registered information systems would provide a reasonably comprehensive record of a consumer's recent and current borrowing. Before making most covered loans, a lender would be required to obtain and review a consumer report from a registered information system.

A lender would be required to establish and follow a compliance program and retain certain records. A lender would be required to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements in this proposal. Furthermore, a lender would be required to retain the loan agreement and documentation obtained for a covered loan, and electronic records in tabular format regarding origination calculations and determinations for a covered loan, for a consumer who qualifies for an exception to or overcomes a presumption of unaffordability for a covered loan, and regarding loan type and terms. The proposed rule also would include an anti-evasion clause.

F. Effective Date

The Bureau is proposing that, in general, the final rule would become effective 15 months after publication of the final rule in the
Federal Register.
The Bureau is proposing that certain provisions necessary to implement the consumer reporting components of the proposal would become effective 60 days after publication of the final rule in the
Federal Register
to facilitate an orderly implementation process.

II. Background

A. Introduction

For most consumers, credit provides a means of purchasing goods or services and spreading the cost of repayment over time. This is true of the three largest consumer credit markets: The market for mortgages ($9.99 trillion in outstanding balances), for student loans ($1.3 trillion), and for auto loans ($1 trillion). This is also one way in which certain types of open-end credit—including home equity loans ($0.14 trillion) and lines of credit ($0.51 trillion)—and at least some credit cards and revolving credit ($0.9 trillion)—can be used.
6

6
For mortgages (one- to four-family) see Bd. of Governors of the Fed. Reserve Sys.,
Mortgage Debt Outstanding (1.54)
(Release Date Mar. 2016),
available at http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm
; for student loans, auto loans, and revolving credit, see Bd. of Governors of the Fed. Reserve Sys.,
Consumer Credit-G.19 February 2016
(Release Date Apr. 2016),
available at http://www.federalreserve.gov/releases/g19/current/default.htm#fn11b
. Home equity loans and lines of credit outstanding estimate derived from Experian & Oliver Wyman,
2015 Q4 Market Intelligence Report: Home Equity Loans Report,
at 16 fig. 21 (2016),
available at http://www.marketintelligencereports.com
and Experian & Oliver Wyman,
2015 Q4 Market Intelligence Report Market Intelligence Report: Home Equity Lines Report,
at 21 fig. 30 (2016),
available at http://www.marketintelligencereports.com
.

Consumers living paycheck to paycheck and with little to no savings have also used credit as a means of coping with shortfalls. These shortfalls can arise from mismatched timing between income and expenses, misaligned cash flows, income volatility, unexpected expenses or income shocks, or expenses that simply exceed income.
7

Whatever the cause of the shortfall, consumers in these situations sometimes seek what may broadly be termed a “liquidity loan.”
8

There are a variety of loans and products that consumers use for these purposes including credit cards, deposit account overdraft, pawn loans, payday loans, vehicle title loans, and installment loans.

7
For a general discussion, see Rob Levy & Joshua Sledge, Ctr. for Fin. Servs. Innovation,
A Complex Portrait: An Examination of Small-Dollar Credit Consumers
(2012),
available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf
.

8
If a consumer's expenses consistently exceed income, a liquidity loan is not likely to be an appropriate solution to the consumer's needs.

Credit cards and deposit account overdraft services are each already subject to specific Federal consumer protection regulations and requirements. The Bureau generally considers these markets to be outside the scope of this rulemaking as discussed further below. The Bureau is also separately engaged in research and evaluation of potential rulemaking actions on deposit account overdraft.

9

Another liquidity option—pawn—generally involves non-recourse loans made against the value of whatever item a consumer chooses to give the lender in return for the funds.
10

The consumer has the option to either repay the loan or permit the pawnbroker to retain and sell the pawned property at the end of the loan term, relieving the borrower from any additional financial obligation. This feature distinguishes pawn loans from most other types of liquidity loans. The Bureau is proposing to exclude non-recourse possessory pawn loans, as described in proposed § 1041.3(e)(5), from the scope of this rulemaking.

9
Credit cards and deposit overdraft services would be excluded from the proposed rule under proposed § 1041.3(e)(3) and (6) as discussed further below. The Bureau is engaged in a separate rulemaking concerning credit offered in connection with prepaid accounts and has proposed to treat such products generally as credit cards.
See
79 FR 77102 (Dec. 23, 2014). The Bureau has issued a Notice and Request for Information on the Impacts of Overdraft Programs on Consumers and has indicated that it is preparing for a separate rulemaking that will address possible consumer protection concerns from overdraft services.
See
77 FR 12031-12034 (Feb. 28, 2012); Kelly Cochran,
Spring 2016 Rulemaking Agenda,
CFPB Blog (May 18, 2016),
http://www.consumerfinance.gov/about-us/blog/spring-2016-rulemaking-agenda/
. In 2015, banks with over $1 billion in assets reported overdraft and NSF (nonsufficient funds) fee revenue of $11.16 billion.
See
Gary Stein,
New Insights on Bank Overdraft Fees and 4 Ways to Avoid Them,
CFPB Blog (Feb. 25, 2016),
http://www.consumerfinance.gov/blog/new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/.
The $11.16 billion total does not include credit union fee revenue and does not separate out overdraft from NSF amounts but overall, overdraft fee revenue accounts for about 72 percent of that amount. Bureau of Consumer Fin. Prot.,
Data Point: Checking Account Overdraft,
at 10 (2014)
[hereinafter CFPB Data Point: Checking Account Overdraft], available at http://files.consumerfinance.gov/f/201407_cfpb_report_

data-point_overdrafts.pdf.
The Federal Reserve Board adopted a set of regulations of overdraft services and the Bureau has published two overdraft research reports on overdraft.
See
Regulation E, 75 FR 31665 (Jun. 4, 2010),
available at https://www.gpo.gov/fdsys/pkg/FR-2010-06-04/pdf/2010-13280.pdf
; Bureau of Consumer Fin. Prot.,
CFPB Study of Overdraft Programs: A White Paper of Initial Data Findings,
(2013), [hereinafter
CFPB Study of Overdraft Programs White Paper
],
available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf
;
CFPB Data Point: Checking Account Overdraft.

10
Pawn lending, also known as pledge lending, has existed for centuries, with references to it in the Old Testament; pawn lending in the U.S. began in the 17th century.
See
Susan Payne Carter,
Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan Rollovers,
at 5 (2012),
available at https://my.vanderbilt.edu/susancarter/files/2011/07/Carter_Susan_JMP_Website2.pdf.
Pawn revenue for 2014 was estimated at $6.3 billion. EZCORP,
EZCORP 2014 Institutional Investor Day,
at 31 (Dec. 11, 2014),
available at http://investors.ezcorp.com/index.php?s=65&item=87
. The three largest pawn firms, Cash America, EZCorp, and First Cash Financial Services, accounted for about one-third of total industry revenue but only 13 percent of the over 11,000 storefronts, that are operated by over 5,000 firms.
Id.;
First Cash Financial Services Inc., 2015 Annual Report (Form 10-K), at 1, 33 (Feb. 17, 2016),
available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm;
EZCORP, Inc., 2015 Annual Report (Form 10-K), at 4, 21 (Dec. 23, 2015),
available at
(
https://www.sec.gov/Archives/edgar/data/876523/000087652315000120/a201510-k.htm
), and Cash America International, Inc., 2015 Annual Report (Form 10-K), at 2, 36 (Feb. 25, 2016),
available at https://www.sec.gov/Archives/edgar/data/807884/000080788416000055/0000807884-16-000055-index.htm
. On April 28, 2016, First Cash Financial Services and Cash America announced they had entered into a merger agreement. The resulting company, FirstCash will operate in 26 States. Press Release, “First Cash Financial Services and Cash America International to Combine in Merger of Equals to Create Leading Operator of Retail Pawn Stores in the United States and Latin America” (Apr. 28, 2016),
available at http://ww2.firstcash.com/sites/default/files/20160428_PR_M.pdf
. Revenue calculations for each firm were made by taking the percentage of total revenue associated with pawn lending activity. For more about pawn lending in general, see John P. Caskey,
Fringe Banking: Cash-Checking Outlets, Pawnshops, and the Poor,
at ch. 2 (1994).

This rulemaking is focused on two general categories of liquidity loan products: Short-term loans and certain higher-cost longer-term loans. The largest category of short-term loans are “payday loans,” which are generally required to be repaid in a lump-sum single-payment on receipt of the borrower's next income payment, and short-term vehicle title loans, which are also almost always due in a lump-sum single-payment, typically within 30 days after the loan is made. The second general category consists of certain higher-cost longer-term loans. It includes both what are often referred to as “payday installment loans”—that is, loans that are repaid in multiple installments with each installment typically due on the borrower's payday or regularly-scheduled income payment and with the lender generally having the ability to automatically collect payments from an account into which the income payment is deposited—and vehicle title installment loans. In addition, the latter category includes higher cost, longer-term loans in which the principal is not amortized but is scheduled to be paid off in a large lump sum payment after a series of smaller, often interest-only, payments. Some of these loans are available at storefront locations, others are available on the internet, and some loans are available through multiple delivery channels. This rulemaking is not limited to closed-end loans but includes open-end lines of credit as well.
11

It also includes short-term products and some more traditional installment loans made by some depository institutions and by traditional finance companies.

11
The Dodd-Frank Act does not define “payday loans,” and the Bureau is not proposing to do so in this rulemaking. The Bureau may do so in a subsequent rulemaking or in another context. In addition, the Bureau notes that various State, local, and tribal jurisdictions may define “payday loans” in ways that may be more or less coextensive with the coverage of the Bureau's proposal.

As described in more detail in part III, the Bureau has been studying these markets for liquidity loans for over four years, gaining insights from a variety of sources. During this time the Bureau has conducted supervisory examinations of a number of payday lenders and enforcement investigations of a number of different types of liquidity lenders, which have given the Bureau insights into the business models and practices of such lenders. Through these processes, and through market monitoring activities, the Bureau also has obtained extensive loan-level data that the Bureau has studied to better understand risks to consumers.
12

The Bureau has published four reports based upon these data, and, concurrently with the issuance of this Notice of Proposed Rulemaking, the Bureau is releasing a fifth report.
13

The Bureau has also carefully reviewed the published literature with respect to small-dollar liquidity loans and a number of outside researchers have presented their research at seminars for Bureau staff. In addition, over the course of the past four years the Bureau has engaged in extensive outreach with a variety of stakeholders in both formal and informal settings, including several Bureau field hearings across the country specifically focused on the subject of small-dollar lending, meetings with the Bureau's standing advisory groups, meetings with State and Federal regulators, meetings with consumer advocates, religious groups, and industry trade associations, consultations with Indian tribes, and through a Small Business Review Panel process as described further below.

12
Information underlying this proposed rule is derived from a variety of sources, including from market monitoring and outreach, third-party studies and data, consumer complaints, the Bureau's enforcement and supervisory work, and the Bureau's expertise generally. In publicly discussing information, the Bureau has taken steps not to disclose confidential information inappropriately and to otherwise comply with applicable law and its own rules regarding disclosure of records and information.
See
12 CFR 1070.41(c).

13
Bureau of Consumer Fin. Prot.,
Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings,
(2013) [hereinafter
CFPB Payday Loans and Deposit Advance Products White Paper
],
available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf
; Bureau of Consumer Fin. Prot.,
CFPB Data Point: Payday Lending,
(2014) [hereinafter
CFPB Data Point: Payday Lending
],
available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
; Bureau of Consumer Fin. Prot.,
Online Payday Loan Payments
(2016) [hereinafter
CFPB Online Payday Loan Payments
],
available at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf;
Bureau of Consumer Fin. Prot.,
Single-Payment Vehicle Title Lending
(2016) [hereinafter
CFPB Single-Payment Vehicle Title Lending
],
available at http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf
; Bureau of Consumer Fin. Prot.,
Supplemental Findings on Payday, Payday Installment, and Vehicle Title Loans, and Deposit Advance Products
(2016) [hereinafter
CFPB Report on Supplemental Findings
].

This Background section provides a brief description of the major components of the markets for both short-term loans and certain higher-cost longer-term loans, describing the product parameters, industry size and structure, lending practices, and business models of each component. It then goes on to describe recent State and Federal regulatory activity in connection with these product markets. Market Concerns—Short-Term Loans and Market Concerns—Longer-Term Loans below, provide a more detailed description of consumer experiences with short-term loans and certain higher-cost longer-term loans, describing research about which consumers use the products, why they

use the products, and the outcomes they experience as a result of the product structures and industry practices.

B. Single-payment and Other Short-Term Loans

At around the beginning of the twentieth century, concern arose with respect to companies that were responding to liquidity needs by offering to “purchase” a consumer's paycheck in advance of it being paid. These companies charged fees that, if calculated as an annualized interest rate, were as high as 400 percent.
14

To address these concerns, between 1914 and 1943, 34 States enacted a form of the Uniform Small Loan Law, which was a model law developed by the Russell Sage Foundation. That law provided for lender licensing and permitted interest rates of between 2 and 4 percent per month, or 24 to 48 percent per year. Those rates were substantially higher than pre-existing usury limits (which generally capped interest rates at between 6 and 8 percent per year) but were viewed by proponents as “equitable to both borrower and lender.”
15

14
Salary advances were structured as wage assignments rather than loans to evade much lower State usury caps of about 8 percent per annum or less.
See
John P. Caskey,
Fringe Banking and the Rise of Payday Lending,
in Credit Markets for the Poor 17, 23 (Patrick Bolton & Howard Rosenthal eds., 2005).

15
Elisabeth Anderson,
Experts, Ideas, and Policy Change: The Russell Sage Foundation and Small Loan Reform, 1909-1941,
37 Theory & Soc'y 271, 276, 283, 285 (2008),
available at http://www.jstor.org/stable/40211037
(quoting Arthur Ham, Russell Sage Foundation, Feb. 1911, Quarterly Report, Library of Congress Russell Sage Foundation Archive, Box 55).

New forms of short-term small-dollar lending appeared in several States in the 1990s,
16

starting with check cashing outlets that would hold a customer's personal check for a period of time for a fee before cashing it (“check holding” or “deferred presentment”).
17

Several market factors had converged around the same time. Consumers were using credit cards more frequently for short-term liquidity lending needs, a trend that continues today.
18

Storefront finance companies, described below in part II.C that had provided small loans changed their focus to larger, collateralized products, including vehicle financing and real estate secured loans. At the same time there was substantial consolidation in the storefront installment lending industry. Depository institutions similarly moved away from short-term small-dollar loans.

16

A Short History of Payday Lending Law,
The Pew Charitable Trusts (July 18, 2012),
http://www.pewtrusts.org/en/research-and-analysis/analysis/2012/07/a-short-history-of-payday-lending-law
.

17

See, e.g.,
Adm'r of the Colo. Unif. Consumer Credit Code, Colo. Dep't of Law, Administrative Interpretation No. 3.104-9201,
Check Cashing Entities Which Provide Funds In Return For A Post-Dated Check Or Similar Deferred Payment Arrangement And Which Impose A Check Cashing Charge Or Fee May Be Consumer Lenders Subject To The Colorado Uniform Consumer Credit Code
(June 23, 1992) (on file).

18
Robert D. Manning,
Credit Card Nation: The Consequences of America's Addiction to Credit
(Basic Books 2000); Amy Traub, Demos,
Debt Disparity: What Drives Credit Card Debt in America,
(2014),
available at http://www.demos.org/sites/default/files/publications/DebtDisparity_1.pdf
)

Around the same time, a number of State legislatures amended their usury laws to allow lending by a broader group of both depository and non-depository lenders by increasing maximum allowable State interest rates or eliminating State usury laws, while other States created usury carve-outs or special rules for short-term loans.
19

The confluence of these trends has led to the development of markets offering what are commonly referred to as payday loans (also known as cash advance loans, deferred deposit, and deferred presentment loans depending on lender and State law terminology), and short-term vehicle title loans that are much shorter in duration than vehicle-secured loans that have traditionally been offered by storefront installment lenders and depository institutions. Although payday loans initially were distributed through storefront retail outlets, they are now also widely available on the internet. Vehicle title loans are typically offered exclusively at storefront retail outlets.

19
Pew Charitable Trusts,
A Short History of Payday Lending Law.
This piece notes that State legislative changes were in part a response to the ability of federally- and State-chartered banks to lend without being subject to the usury laws of the borrower's State.

These markets as they have evolved over the last two decades are not strictly segmented. There is substantial overlap between market products and the borrowers who use them. For example, in a 2013 survey, almost 18 percent of U.S. households that had used a payday loan in the prior year had also used a vehicle title loan.
20

There is also an established trend away from “monoline” or single-product lending companies. Thus, for example, a number of large payday lenders also offer vehicle title and installment loans.
21

The following discussion nonetheless provides a description of major product types.

20
Data derived from Appendix D—Alternative Financial Services: National Tables. Fed. Deposit Ins. Corp.,
2013 FDIC National Survey of Unbanked and Underbanked Households: Appendices,
at 57-93 (2014),
available at https://www.fdic.gov/householdsurvey/2013appendix.pdf
.

21
See for example, Advance America; Cash America Pawn; Check Into Cash; Community Choice Financial/CheckSmart; Speedy Cash; PLS Financial Services and Money Tree Inc.
Title Loans,
Advance America,
https://www.advanceamerica.net/services/title-loans; Auto Title Loans
(last visited Mar. 3, 2016);
Auto Title Loans,
Cash America Pawn,
http://www.cashamerica.com/LoanOptions/AutoTitleLoans.aspx)
(last visited Mar. 3, 2016);
Our Process & Information,
Check Into Cash,
https://checkintocash.com/title-loans/
(last visited Mar. 3, 2016); Title Loans, Community Choice Financial/CheckSmart,
http://www.checksmartstores.com/utah/title-loans/
(last visited Mar. 3, 2016);
Title Loans, Speedy Cash, https://www.speedycash.com/title-loans/
(last visited Mar. 3, 2016);
Auto Title Loans,
PLS Financial Services,
http://www.pls247.com/ms/loans/auto-title-loans.html
(last visited Mar. 3, 2016). Moneytree offers vehicle title and installment loans in Idaho and Nevada.
Idaho Products,
Money Tree Inc.,
https://www.moneytreeinc.com/loans/idaho
(last visited Mar. 3, 2016);
Nevada Products,
Money Tree Inc.,
https://www.moneytreeinc.com/loans/nevada
(last visited Mar. 3, 2016).

Storefront Payday Loans

The market that has received the greatest attention among policy makers, advocates, and researchers is the market for single-payment payday loans. These payday loans are short-term small-dollar loans generally repayable in a single payment due when the consumer is scheduled to receive a paycheck or other inflow of income (
e.g.,
government benefits).
22

For most borrowers, the loan is due in a single payment on their payday, although State laws with minimum loan terms—seven days for example—or lender practices may affect the loan duration in individual cases. The Bureau refers to these short-term payday loans available at retail locations as “storefront payday loans,” but the requirements for borrowers taking online payday loans are generally similar, as described below. There are now 36 States that either have created a carve-out from their general usury cap for payday loans or have no usury caps on consumer loans.
23

The remaining 14

States and the District of Columbia either ban payday loans or have fee or interest rate caps that payday lenders apparently find too low to sustain their business models. As discussed further below, several of these States previously had authorized payday lending but subsequently changed their laws.

22
For convenience, this discussion refers to the next scheduled inflow of income as the consumer's next “payday” and the inflow itself as the consumer's “paycheck” even though these are misnomers for consumers whose income comes from government benefits.

23
For a list of States see,
State Payday Loan Regulation and Usage Rates,
The Pew Charitable Trusts (Jan. 14, 2014),
http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates
. One source lists 35 States as authorizing payday lending. Susanna Montezemolo, Ctr. for Responsible Lending,
The State of Lending in America & Its Impact on U.S. Households: Payday Lending Abuses and Predatory Practices,
at 32-33 (2013),
available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf.
Another public compilation lists 32 States as having authorized or allowed payday lending.
See
Consumer Fed'n of Am.,
Legal Status of Payday Loans by State, http://www.paydayloaninfo.org/state-information
(last visited Apr. 6, 2016).

Product definition and regulatory environment.
As noted above, payday loans are typically repayable in a single payment on the borrower's next payday. In order to help ensure repayment, in the storefront environment the lender generally holds the borrower's personal check made out to the lender—usually post-dated to the loan due date in the amount of the loan's principal and fees—or the borrower's authorization to electronically debit the funds from her checking account, commonly known as an automated clearing house (ACH) transaction.
24

Payment methods are described in more detail below in part II.D.

24
The Bureau is aware from market outreach that at a storefront payday lender's Tennessee branch, almost 100 percent of customers opted to provide ACH authorization rather than leave a post-dated check for their loans.
See also Can Anyone Get a Payday Loan?,
Speedy Cash,
https://www.speedycash.com/faqs/payday-loans/can-anyone-get-a-payday-loan/
(last visited Feb. 4, 2016) (“If you choose to apply in one of our payday loan locations, you will need to provide a repayment source which can be a personal check or your bank routing information.”); QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 3, 6 (Mar. 12, 2015),
available at http://www.sec.gov/Archives/edgar/data/1289505/000119312515088809/d854360d10k.htm
; First Cash Fin. Servs., Inc., 2015 Annual Report (Form 10-K), at 20 (Feb. 17, 2016),
available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm
.

Payday loan sizes vary depending on State law limits, individual lender credit models, and borrower demand. Many States set a limit on payday loan size; $500 is a common loan limit although the limits range from $300 to $1,000.
25

In 2013, the Bureau reported that the median loan amount for storefront payday loans was $350, based on supervisory data.
26

This finding is broadly consistent with other studies using data from one or more lenders as well as with self-reported information in surveys of payday borrowers
27

and State regulatory reports.
28

25
At least 19 States cap payday loan amounts between $500 and $600 (Alabama, Alaska, Florida, Hawaii, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, and Virginia), and California limits payday loans to $300 (including the fee) and Delaware caps loans at $1,000. Ala. Code sec. 5-18A-12(a), Alaska Stat. sec. 06.50.410, Cal. Fin. Code sec. 23035(a), Del. Code Ann. tit. 5, sec. 2227(7), Fla. Stat. sec. 560.404(5), Haw. Rev. Stat. sec. 480F-4(c), Iowa Code sec. 533D.10(1)(b), Kan. Stat. Ann. Sec. 16a-2-404(1)(c), Ky. Rev. Stat. Ann. Sec. 286.9-100(9), Mich. Comp. Laws sec. 487.2153(1), Miss. Code Ann. Sec. 75-67-519(2), Mo. Rev. Stat. sec. 408.500(1), Neb. Rev. Stat. sec. 45-919(1)(b), N.D. Cent. Code sec. 13-08-12(3); Ohio Rev. Code Ann. sec. 1321.39(A), Okla. Stat. tit. 59, sec. 3106(7), R.I. Gen. Laws sec. 19-14.4-5.1(a), S.C. Code Ann. sec. 34-39-180(B), S.D. Codified Laws sec. 54-4-66, Tenn. Code Ann. Sec. 45-17-112(o), Va. Code Ann. Sec. 6.2-1816(5). States that limit the loan amount to the lesser of a percent of the borrower's income or a fixed dollar amount include Idaho—25 percent or $1,000, Illinois—25 percent or $1,000, Indiana—20 percent or $550, Washington—30 percent or $700, and Wisconsin—35 percent or $1,500. At least two States cap the maximum payday loan at 25 percent of the borrower's gross monthly income (Nevada and New Mexico). A few States laws are silent as to the maximum loan amount (Utah and Wyoming). Idaho Code Ann. § 28-46-413(1), (2); 815 Ill. Comp. Stat. 122/2-5(e); Ind. Code §§ 24-4.5-7-402, -404; Wash. Rev. Code § 31.45.073(2); Wis. Stat. § 138.14(12)(b); Nev. Rev. Stat. § 604A.425(1)(b), N.M. Stat. Ann. § 58-15-32(A), Utah Code Ann. § 7-23-401, Wyo. Stat. Ann. § 40-14-363.

26

CFPB Payday Loans and Deposit Advance Products White Paper,
at 15.

27
Leslie Parrish & Uriah King, Ctr. for Responsible Lending,
Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of total Volume,
at 21 (2009),
available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf
(reporting $350 as the average loan size); Pew Charitable Trusts,
Payday Lending in America: Who Borrows, Where They Borrow, and Why,
at 9 (2012) [hereinafter
Pew Payday Lending in America: Report 1
],
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf)
(reporting $375 as the average).

28
For example: $361.21 (Illinois average, see Ill. Dep't. of Fin. & Prof. Reg.,
Illinois Trends Report All Consumer Loan Products Through December 2013,
at 15 (May 28, 2014),
available at https://www.idfpr.com/dfi/ccd/pdfs/IL_Trends_Report%202013.pdf
); $350 (Idaho average, see Idaho Dep't. of Fin.,
Idaho Credit Code “Fast Facts” With Fiscal and Annual Report Data as of January 1, 2016,
at 5,
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf
); $389.50 (Washington average, see Wash. State Dep't. of Fin. Insts., 2014 Payday Lending Report, at 6,
available at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf.

The fee for a payday loan is generally structured as a percentage or dollar amount per $100 borrowed, rather than a periodic interest rate based on the amount of time the loan is outstanding. Many State laws set a maximum amount for these fees, with 15 percent ($15 per $100 borrowed) being the most common limit.
29

The median storefront payday loan fee is $15 per $100; thus for a $350 loan, the borrower must repay $52.50 in finance charges together with the $350 borrowed for a total repayment amount of $402.50.
30

The annual percentage rate (APR) on a 14-day loan with these terms is 391 percent.
31

For payday borrowers who receive monthly income and thus receive a 30-day or monthly payday loan—many of whom are Social Security recipients
32

—a $15 per $100 charge on a $350 loan for a term of 30 days equates to an APR of about 180 percent. The Bureau has found the median loan term for a storefront payday loan to be 14 days, with an average term of 18.3 days. The longer average loan duration is due to State laws that require minimum loan terms that may extend beyond the borrower's next pay date.
33

Fees and loan amounts are higher for online loans, described in more detail below.

29
Of the States that expressly authorize payday lending, Rhode Island has the lowest cap at 10 percent of the loan amount. Florida has the same fee amount but also allows a flat $5 verification fee. Oregon's fees are $10 per $100 capped at $30 plus 36 percent interest. Some States have tiered caps depending on the size of the loan. Generally, in these States the cap declines with loan size. However, in Mississippi, the cap is $20 per hundred for loans under $250 and $21.95 for larger loans (up to the State maximum of $500). Seven States do not cap fees on payday loans or are silent on fees (Delaware, Idaho, Nevada, South Dakota, Texas (no cap on credit access business fees), Utah, and Wisconsin). Depending on State law, the fee may be referred to as a “charge,” “rate,” “interest” or other similar term. R.I. Gen. Laws § 19-14.4-4(4), Fla. Stat. § 560.404(6), Or. Rev. Stat. § 725A.064(1)-(2), Miss. Code Ann. § 75-67-519(4), Del. Code Ann. tit. 5, § 2229, Idaho Code Ann. § 28-46-412(3), S.D. Codified Laws § 54-4-44, Tex. Fin. Code Ann. § 393.602(b), Utah Code Ann. § 7-23-401, Wis. Stat. § 138.14(10) (a).

30

CFPB Payday Loans and Deposit Advance Products White Paper,
at 15-17.

31
Throughout the part II., APR refers to the annual percentage rate calculated as required by the Truth in Lending Act, 15 U.S.C. 1601
et seq.
and Regulation Z, 12 CFR 1026, except where otherwise specified.

32

CFPB Payday Loans and Deposit Advance Products White Paper,
at 16, 19 (33 percent of payday loans borrowers receive income monthly; 18 percent of payday loan borrowers are public benefits recipients, largely from Social Security including Supplemental Security Income and Social Security Disability, typically paid on a monthly basis).

33
For example, Washington requires the due date to be on or after the borrower's next pay date but if the pay date is within seven days of taking out the loan, the due date must be on the second pay date after the loan is made. Wash. Rev. Code § 31.45.073(2). A number of States set minimum loan terms, some of which are tied directly to the consumer's next payday.

On the loan's due date, the terms of the loan obligate the borrower to repay the loan in full. Although the States that created exceptions to their usury limits for payday lending generally did so on the theory these were short-term loans to which the usual usury rules did not easily apply, in 19 of the States that authorize payday lending the lender is permitted to roll over the loan when it comes due. A rollover occurs when, instead of repaying the loan in full at maturity, the consumer pays only the fees due and the lender agrees to extend the due date.
34

By rolling over, the loan repayment of the principal is extended for another period of time, usually equivalent to the original loan term, in

return for the consumer's agreement to pay a new set of fees calculated in the same manner as the initial fees (
e.g.,
15 percent of the loan principal). The rollover fee is not applied to reduce the loan principal or amortize the loan. As an example, if the consumer borrows $300 with a fee of $45 (calculated as $15 per $100 borrowed), the consumer will owe $345 on the due date, typically 14 days later. On the due date, if the consumer cannot afford to repay the entire $345 due or is otherwise offered the option to roll over the loan, she will pay the lender $45 for another 14 days. On the 28th day, the consumer will owe the original $345 and if she pays the loan in full then, will have paid a total of $390 for the loan.

34
This proposal uses the term “rollover” but this practice is sometimes described under State law or by lenders as a “renewal” or an “extension.”

In some States in which rollovers are permitted they are subject to certain limitations such as a cap on the number of rollovers or requirements that the borrower amortize—repay part of the original loan amount—on the rollover. Other States have no restrictions on rollovers. Specially, seventeen of the States that authorize single-payment payday lending prohibit lenders from rolling over loans and twelve more States impose some rollover limitations.
35

However, in most States where rollovers are prohibited or limited, there is no restriction on the lender immediately making a new loan to the consumer (with new fees) after the consumer has repaid the prior loan. New loans made the same day or “back-to-back” loans effectively replicate a rollover because the borrower remains in debt to the lender on the borrower's next payday.
36

A handful of States have implemented a cooling-off period before a lender may make a new loan. The most common cooling-off period is one day, although some States have longer periods following a specified number of rollovers or back-to-back loans.
37

35
States that prohibit rollovers include California, Florida, Hawaii, Illinois, Indiana, Kentucky, Michigan, Minnesota, Mississippi, Nebraska, New Mexico, Oklahoma, South Carolina, Tennessee, Virginia, Washington, and Wyoming. Other States such as Iowa and Kansas restrict a loan from being repaid with the proceeds of another loan. Cal. Fin. Code § 23037(a), Fla. Stat. § 560.404(18), Haw. Rev. Stat. § 480F-4(d), 815 Ill. Comp. Stat. 122/2-30, Ind. Code § 24-4.5-7-402(7), Ky. Rev. Stat. Ann. § 286.9-100(14), Mich. Comp. Laws § 487.2155(1), Minn. Stat. § 47.60(2)(f), Miss. Code Ann. § 75-67-519(5), Neb. Rev. Stat. § 45-919(1)(f), N.M. Stat. Ann. § 58-15-34(A), Okla. Stat. tit. 59, § 3109(A), S.C. Code Ann. § 34-39-180(F), Tenn. Code Ann. § 45-17-112(q), Va. Code Ann. § 6.2-1816(6), Wash. Rev. Code § 31.45.073(2), Wyo. Stat. Ann. § 40-14-364, Iowa Code § 533D.10(1)(e), Kan. Stat. Ann. § 16a-2-404(6). Other States that permit some degree of rollovers include Alabama (one), Alaska (two), Delaware (four), Idaho (three), Missouri (six if there is at least 5 percent principal reduction on each rollover), Nevada (may extend loan up to 60 days after the end of the initial loan term), North Dakota (one), Oregon (two), Rhode Island (one), South Dakota (four if there is at least 10 percent principal reduction on each rollover), Utah (allowed up to 10 weeks after the execution of the first loan), and Wisconsin (one). Ala. Code § 5-18A-12 (b), Alaska Stat. § 06.50.470(b), Del. Code Ann. tit. 5, § 2235A (a)(2), Idaho Code Ann. § 28-46-413(9), Mo. Rev. Stat. § 408.500(6), Nev. Rev. Stat. § 604A.480(1), N.D. Cent. Code § 13-08-12(12), Or. Rev. Stat. § 725A.064(6), R.I. Gen. Laws § 19-14.4-5.1(g), S.D. Codified Laws § 54-4-65, Utah Code Ann. § 7-23-401 (4)(b), Wis. Stat. § 138.14 (12)(a).

36
See
CFPB Payday Loans and Deposit Advance Products White Paper,
at 4; Adm'r of the Colo. Unif. Consumer Credit Code, Colo. Dep't of Law,
Payday Lending Demographic and Statistical Information: July 2000 through December 2012,
at 24 (Apr. 10, 2014) [hereinafter
Colorado UCCC 2000-2012 Demographic and Statistical Information
],
available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf. Pew Payday Lending in America: Report 1,
at 7; Parrish & King, at 7.

37
States with cooling-off periods include: Alabama (next business day after a rollover is paid in full); Florida (24 hours); Illinois (seven days after a consumer has had payday loans for more than 45 days); Indiana (seven days after five consecutive loans); New Mexico (10 days after completing an extended payment plan); North Dakota (three business days); Ohio (one day with a two loan limit in 90 days, four per year); Oklahoma (two business days after fifth consecutive loan); Oregon (seven days); South Carolina (one business day between all loans and two business days after seventh loan in a calendar year); Virginia (one day between all loans, 45 days after fifth loan in a 180 day period, and 90 days after completion of an extended payment plan or extended term loan); and Wisconsin (24 hour after renewals). Ala. Code § 5-18A-12(b); Fla. Stat. § 560.404(19); 815 Ill. Comp. Stat. 122/2-5(b); Ind. Code § 24-4.5-7-401(2); N.M. Stat. Ann. § 58-15-36; N.D. Cent. Code § 13-08-12(4); Ohio Rev. Code Ann. § 1321.41(E), (N), (R); Okla. Stat. tit. 59, § 3110; Or. Rev. Stat. § 725A.064(7); S.C. Code Ann. § 34-39-270(A), (B); Va. Code Ann. § 6.2-1816(6); Wis. Stat. § 138.14(12)(a).

Twenty States require payday lenders to offer extended repayment plans to borrowers who encounter difficulty in repaying payday loans.
38

Some States' laws are very general and simply provide that a payday lender may allow additional time for repayment of a loan. Other laws provide more detail about the plans including: When lenders must offer repayment plans; how borrowers may elect to participate in repayment plans; the number and timing of payments; the length of plans; permitted fees for plans; requirements for credit counseling; requirements to report plan payments to a statewide database; cooling-off or “lock-out” periods for new loans after completion of plans; and the consequences of plan defaults. The effects of these various restrictions are discussed further below in Market Concerns—Short-Term Loans.

38
States with statutory extended repayment plans include: Alabama, Alaska, California, Delaware, Florida, Idaho, Illinois, Indiana, Louisiana, Michigan (fee permitted), Nevada, New Mexico, Oklahoma (fee permitted), South Carolina, Utah, Virginia, Washington, Wisconsin, and Wyoming. Florida also requires that as a condition of providing a repayment plan (called a grace period), borrowers make an appointment with a consumer credit counseling agency and complete counseling by the end of the plan. Ala. Code § 5-18A-12(c), Alaska Stat. § 06.50.550(a), Cal. Fin. Code § 23036(b), Del. Code Ann. tit. 5, § 2235A(a)(2), Fla. Stat. § 560.404(22)(a), Idaho Code Ann. § 28-46-414, 815 Ill. Comp. Stat. 122/2-40, Ind. Code § 24-4.5-7-401(3), La. Rev. Stat. Ann. § 9:3578.4.1, Mich. Comp. Laws § 487.2155(2), Nev. Rev. Stat. § 604A.475(1), N.M. Stat. Ann. § 58-15-35, Okla. Stat. tit. 59, § 3109(D), S.C. Code Ann. § 34-39-280, Utah Code Ann. § 7-23-403, Va. Code Ann. § 6.2-1816(26), Wash. Rev. Code § 31.45.084(1), Wis. Stat. § 138.14(11)(g), Wyo. Stat. Ann. § 40-14-366(a).

Industry size and structure.
There are various estimates as to the number of consumers who use payday loans on an annual basis. One survey found that 2.4 million households (2 percent of U.S. households) used payday loans in 2013.
39

In another survey, 4.2 percent of households reported taking out a payday loan.
40

These surveys referred to payday loans generally, and did not specify whether they were referring to loans made online or at storefront locations. One report estimated the number of individual borrowers, rather than households, was higher at approximately 12 million and included both storefront and online loans.
41

See Market Concerns—Short-term Loans for additional information on borrower characteristics.

39
Fed. Deposit Ins. Corp.,
2013 FDIC National Survey of Unbanked and Underbanked Households: Appendices,
at 83, 85 (2014),
available at https://www.fdic.gov/householdsurvey/2013appendix.pdf
.

40
Jesse Bricker,
et al., Changes in U.S. Family Finances from 2010 to 2013: Evidence From the Survey of Consumer Finances,
100 Fed. Reserve Bulletin no. 4, at 29 (Sept. 2014),
available at http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf
.

41

Pew Payday Lending in America: Report 1,
at 4.

There are several ways to gauge the size of the storefront payday loan industry. Typically, the industry has been measured by counting the total dollar value of each loan made during the course of a year, counting each rollover, back-to-back loan or other reborrowing as a new loan that is added to the total. By this metric, one analyst estimated that from 2009 to 2014, storefront payday lending generated approximately $30 billion in new loans per years and that by 2015 the volume had declined to $23.6 billion,
42

although these numbers may include products other than single-payment loans. Alternatively, the industry can be measured by calculating the dollar amount of loan balances outstanding. Given the amount of payday loan reborrowing, which results in the same funds of the lender being used to

finance multiple loan originations, the dollar amount of loan balances outstanding may provide a more nuanced sense of the industry's scale. Using this metric, the Bureau estimates that in 2012, storefront payday lenders held approximately $2 billion in outstanding single-payment loans.
43

In 2015, industry revenue (fees paid on storefront payday loans) was an estimated $3.6 billion, representing 15 percent of loan originations.
44

42
John Hecht, Jefferies LLC,
The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation
(2016) (slide presentation) (on file); John Hecht, Jeffries LLC,
The State of Short-Term Credit in a Constantly Changing Environment
(2015) at 4 (slide presentation) (on file).

43
Bureau staff estimate based on public company financial information, confidential information gathered in the course of statutory functions, and industry analysts' reports. The estimate is derived from lenders' single-payment payday loans gross receivables and gross revenue and industry analysts' reports on loan volume and revenue. No calculations were done for 2013 to 2015, but that estimate would be less than $2 billion due to changes in the market as the industry has shifted away from single-payment payday loans to products discussed in part II.C below.

44
Hecht,
The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation.

About ten large firms account for half of all payday storefront locations.
45

Several of these firms are publicly traded companies offering a diversified range of products that also include installment and pawn loans.
46

Other large payday lenders are privately held,
47

and the remaining payday loan stores are owned by smaller regional or local entities. The Bureau estimates there are about 2,400 storefront payday lenders that are small entities as defined by the Small Business Administration (SBA).
48

45

See
Montezemolo,
Payday Lending Abuses and Predatory Practices,
at 9.

46
The publicly traded firms are Cash America (CSH), Community Choice Financial Inc./Checksmart (CCFI), EZCORP (EZPW), First Cash Financial Services (FCFS), and QC Holdings (QCCO). Cash America has de-emphasized payday loans with the exception of stores in Ohio and Texas, and in November 2014 it migrated its online loans to its spin-off company, Enova. Cash America Int'l, Inc., Investor Relations Presentation, at 6, 9,
available at http://www.cashamerica.com/Files/InvestorPresentations/15_0331%20CSH%20IR%20Presentation.pdf.
First Cash Financial Services closed most of its U.S. payday and vehicle title loan credit access business locations, leaving 42 Texas storefronts at the end of 2015. Its primary focus is on its pawn loan locations; only 4 percent of its revenue is from non-pawn consumer loans. (Credit access businesses are described below.) First Cash Fin. Servs., Inc., 2015 Annual Report (Form 10-K), at 1, 7. As noted above, in April 2016, First Cash Financial Services announced a merger agreement with Cash America. QC Holdings delisted from Nasdaq on Feb. 16, 2016 and is traded over-the-counter. QC Holding Companies,
http://www.qcholdings.com/investor.aspx?id=1
(last visited Apr. 7, 2016). Until July 2015, EZCORP offered payday, vehicle title, and installment loans but now focuses domestically on pawn lending. EZCORP, 2015 Annual Report (Form 10-K), at 3, 23.

47
The larger privately held payday lending firms include Advance America, ACE Cash Express, Axcess Financial (CNG Financial, Check `n Go, Allied Cash), Check Into Cash, DFC Global (Money Mart), PLS Financial Services, and Speedy Cash Holdings Corporation.
See
Montezemolo,
Payday Lending Abuses and Predatory Practices,
at 9-10; John Hecht, Stephens, Inc.,
Alternative Financial Services: Innovating to Meet Customer Needs in an Evolving Regulatory Framework,
(Feb. 27, 2014) (on file).

48
Bureau staff estimated the number of storefront payday lenders using licensee information from State financial regulators, firm revenue information from public filings and non-public sources, and, for a small number of States, industry market research relying on telephone directory listings from Steven Graves and Christopher Peterson,
available at http://www.csun.edu/~sg4002/research/data/US_pdl_addr.xls
. Based on these sources, there are approximately 2,503 storefront payday lenders, including those operating primarily as loan arrangers or brokers, in the United States. Based on the publicly-available revenue information, at least 56 of the firms have revenue above the small entity threshold. Most of the remaining firms operate a very small number of storefronts. Therefore, while some of the firms without publicly available information may have revenue above the small entity threshold, in the interest of being inclusive they are all assumed to be small entities.

There were an estimated 15,766 payday loan stores in 2014 within the 36 States in which storefront payday lending occurs.
49

By way of comparison, there were 14,350 McDonald's fast food outlets in the United States in 2014.
50

49
Bureau staff estimated the number of storefront payday lenders using the method referenced in the immediately preceding footnote.

50
McDonald's Corp., 2014 Annual Report (Form 10-K) at 22 (Feb. 24, 2015),
available at http://www.sec.gov/Archives/edgar/data/63908/000006390815000016/mcd-12312014x10k.htm
.

The average number of payday loan stores in a county with a payday loan store is 6.32.
51

The Bureau has analyzed payday loan store locations in States which maintain lists of licensed lenders and found that half of all stores are less than one-third of a mile from another store, and three-quarters are less than a mile from the nearest store.
52

Even the 95th percentile of distances between neighboring stores is only 4.3 miles. Stores tend to be closer together in counties within metropolitan statistical areas (MSA).
53

In non-MSA counties the 75th percentile of distance to the nearest store is still less than one mile, but the 95th percentile is 22.9 miles.

51
James R. Barth, Jitka Hilliard, John S. Jaera Jr., & Yanfei Sun,
Do State Regulations Affect Payday Lender Concentration?,
at 12 (2015),
available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581622
.

52

CFPB Report on Supplemental Findings,
at ch. 3.

53
An MSA is a geographic entity delineated by the Office of Management and Budget. An MSA contains a core urban area of 50,000 or more in population.
See Metropolitan and Micropolitan,
U.S. Census Bureau,
http://www.census.gov/population/metro/
(last visited Apr. 7, 2016).

Research and the Bureau's own market outreach indicate that payday loan stores tend to be relatively small with, on average, three full-time equivalent employees.
54

An analysis of loan data from 29 States found that the average store made 3,541 advances in a year.
55

Given rollover and reborrowing rates, a report estimated that the average store served fewer than 500 customers per year.
56

54
Mark Flannery & Katherine Samolyk,
Payday Lending: Do the Costs Justify the Price?
(FDIC Center for Fin. Research, Working Paper No. 2005-09, 2005),
available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf; IHS Global Insight USA (Inc.), Economic Impact of the Payday Lending Industry
, at 3 (2009), available at
http://cfsaa.com/Portals/0/Policymakers/20090515_Research_IHS_EconomicImpactofPayday.pdf (and on file).

55
Montezemolo, at 26.

56
Pew Charitable Trusts,
Payday Lending in America Report 3: Policy Solutions,
at 18 (2013),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/pewpaydaypolicysolutionsoct2013pdf.pdf
.

Marketing, underwriting, and collections practices.
Payday loans tend to be marketed as a short-term bridge to cover emergency expenses. For example, one lender suggests that, for consumers who have insufficient funds on hand to meet such an expense or to avoid a penalty fee, late fee, or utility shut-off, a payday loan can “come in handy” and “help tide you over until your next payday.”
57

Some lenders offer new borrowers their initial loans at no fee (“first loan free”) to encourage consumers to try a payday loan.
58

Stores are typically located in high-traffic commuting corridors and near shopping areas where consumers obtain groceries and other staples.
59

57

Cash Advance/Short-term Loans,
Cash America Int'l Inc.,
http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last visited Apr. 7, 2016).

58
For example, Instant Cash Advance introductory offer of a free (no fee) cash advance of $200,
http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php
(storefront payday loans); Check N Title Loans, first loan free,
http://www.checkntitle.com/
(storefront payday and title loans); AmeriTrust Financial LLC, first payday loan free,
http://www.americantrustcash.com/payday-loans
, (storefront payday, title, and installment loans, first loan free on payday loans) (all firm Web sites last visited on Dec. 21, 2015).

59
First Cash Fin. Servs., Inc., 2015 Annual Report (Form 10-K), at 9; QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 11; Cmty. Choice Fin. Inc., 2015 Annual Report (Form 10-K), at 5 (Mar. 30, 2016),
available at https://www.sec.gov/Archives/edgar/data/1528061/000110465916108753/a15-23332_110k.htm
.

The evidence of price competition among payday lenders is mixed. In their financial reports, publicly traded payday lenders have reported their key competitive factors to be non-price related. For instance, they cite location, customer service, and convenience as some of the primary factors on which payday lenders compete with one another, as well as with other financial service providers.
60

Academic studies have found that, in States with rate caps, loans are almost always made at

the maximum rate permitted.
61

Another study likewise found that in States with rate caps, firms lent at the maximum permitted rate, but that lenders operating in multiple States with varying rate caps raise their fees to those caps rather than charging consistent fees company-wide. The study additionally found that in States with no rate caps, different lenders operating in those States charged different rates. The study reviewed four lenders that operate in Texas
62

and observed differences in the cost to borrow $300 per two-week pay period: Two lenders charged $61 in fees, one charged $67, and another charged $91, indicating some level of price variation between lenders (ranging from about $20 to $32 per $100 borrowed).
63

60

See
QC Holdings, Inc., 2015 Annual Report (Form 10-K), at 12-13.

61
Robert DeYoung & Ronnie Phillips,
Payday Loan Pricing
(The Fed. Reserve Bank of Kansas City, Working Paper No. RWP 09-07, 2009), at 27-28,
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1066761
(studying rates on loans in Colorado between 2000 and 2006); Mark Flannery & Katherine Samolyk, at 9-10.

62
In Texas, these lenders operate as credit services organizations or loan arrangers with no fee caps, described in more detail below. Pew Charitable Trusts,
How State Rate Limits Affect Payday Loan Prices,
(2014),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf
.

63

Id.

The application process for a payday loan is relatively simple. For a storefront payday loan, a borrower must generally provide some verification of income (typically a pay stub) and evidence of a personal deposit account.
64

Although a few States impose limited requirements that lenders consider a borrower's ability to repay,
65

storefront payday lenders generally do not consider a borrower's other financial obligations or require collateral (other than the check or electronic debit authorization) for the loan. Most storefront payday lenders do not consider traditional credit reports or credit scores when determining loan eligibility, nor do they report any information about payday loan borrowing history to the nationwide consumer reporting agencies, TransUnion, Equifax, and Experian.
66

From market outreach activities and confidential information gathered in the course of statutory functions, the Bureau is aware that a number of storefront payday lenders obtain data from one or more specialty consumer reporting agencies to check for previous payday loan defaults, identify recent inquiries that suggest an intention to not repay the loan, and perform other due diligence such as identity and deposit account verification. Some storefront payday lenders use analytical models and scoring that attempt to predict likelihood of default. Through market outreach and confidential information gathered in the course of statutory functions, the Bureau is aware that many storefront payday lenders limit their underwriting to first-time borrowers or those returning after an absence.

64

See, e.g.,
the process as described by one lender:
In-Store Cash Advance FAQ,
Check Into Cash,
https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016).

65
For example, Utah requires lenders to make an inquiry to determine that the borrower has the ability to repay the loan, which may include rollovers or extended payment plans. This determination may be made through borrower affirmation of ability to repay, proof of income, repayment history at the same lender, or information from a consumer reporting agency. Utah Code § 7-23-401. Missouri requires lenders to consider borrower financial ability to reasonably repay under the terms of the loan contract, but does not specify how lenders may satisfy this requirement Mo. Rev. Stat § 408.500(7). Other States prohibit loans that exceed a certain percentage of the borrower's gross monthly income (generally between 20 and 35 percent) as a proxy for ability to repay. These States include Idaho, Illinois, Indiana, Montana, New Mexico, Oregon, Washington, and Wisconsin. Idaho Code § 28-46-412(2), 815 Ill. Comp. Stat § 122/2-5(e), Ind. Code § 24-4.5-7-402(1), Mont. Code Ann. § 31-1-723(8), N.M. Stat. Ann. § 58-15-32(A), Or. Admin. Rule § 441-735-0272(d), Wash. Rev. Code § 31.45.073(2), Wis. Stat. § 138.14.

66

See, e.g.,
Neil Bhutta, Paige Marta Skiba, & Jeremy Tobacman,
Payday Loan Choices and Consequences
(2014) at 3,
available at http://www.calcfa.com/docs/PaydayLoanChoicesandConsequences.pdf
.

From market outreach, the Bureau is aware that the specialty consumer reporting agencies contractually require any lender that obtains data to also report data to them, although compliance may vary. Reporting usually occurs on a real-time or same-day basis. Separately, 14 States require lenders to check statewide databases before making each loan in order to ensure that their loans comply with various State restrictions.
67

These States likewise require lenders to report certain lending activity to the database, generally on a real-time or same-day basis. As discussed in more detail above, these State restrictions may include prohibitions on consumers having more than one payday loan at a time, cooling-off periods, or restrictions on the number of loans consumers may take out per year.

67
The States with databases are Alabama, Delaware, Florida, Illinois Indiana, Kentucky, Michigan, New Mexico, North Dakota, Oklahoma, South Carolina, Virginia, Washington, and Wisconsin. Illinois also requires use of its database for payday installment loans, vehicle title loans, and some installment loans. Some State laws allow lenders to charge borrowers a fee to access the database that may be set by statute. Ala. Code § 5-18A-13(o), Del. Code Ann. tit. 5, § 2235B, Fla. Stat. § 560.404(23), 815 Ill. Comp. Stat. 122/2-15, Ind. Code § 24-4.5-7-404(4), Ky. Rev. Stat. Ann. § 286.9-100(19)(b), Mich. Comp. Laws § 487.2142, N.M. Stat. Ann. § 58-15-37(B), N.D. Cent. Code § 13-08-12(4), Okla. Stat. tit. 59, § 3109(B)(2)(b), S.C. Code Ann. § 34-39-175, Va. Code Ann. § 6.2-1810, Wash. Rev. Code § 31.45.093, Wis. Stat. § 138.14(14).

Although a consumer is generally required when obtaining a loan to provide a post-dated check or authorization for an electronic debit of the consumer's account which could be presented to the consumer's bank, consumers are in practice strongly encouraged and in some cases required by lenders to return to the store when the loan is due to “redeem” the check.
68

Some lenders give borrowers appointment cards with a date and time to encourage them to return with cash. For example, one major storefront payday lender explained that after loan origination “the customer then makes an appointment to return on a specified due date, typically his or her next payday, to repay the cash advance . . . . Payment is usually made in person, in cash at the center where the cash advance was initiated . . . .”
69

68
According to the Bureau's market outreach, if borrowers provided ACH authorization and return to pay the loan in cash, the authorization may be returned to them or voided.

69
Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar. 15, 2012),
available at http://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm
.
See also In-Store Cash Advance FAQ,
Check Into Cash,
https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016)
(“We hold your check until your next payday, at which time you can come in and pay back the advance.”).

The Bureau is aware, from confidential information gathered in the course of statutory functions and from market outreach, that lenders routinely make reminder calls to borrowers a few days before loan due dates to encourage borrowers to return to the store. One large lender reported this practice in a public filing.
70

Another major payday lender with a predominantly storefront loan portfolio reported that in 2014, over 90 percent of its payday and installment loans were repaid or renewed in cash;
71

this provides an opportunity for store personnel to solicit borrowers to roll over or reborrow while they visit the store to discuss their loans or make loan payments. The Bureau is aware, from confidential information gathered in the course of statutory functions, that one or more storefront payday lenders have operating policies that specifically state that cash is preferred because only half of their

customers' checks would clear if deposited on the loan due dates. One storefront payday lender even requires its borrowers to return to the store to repay. Its Web site states: “All payday loans must be repaid with either cash or money order. Upon payment, we will return your original check to you.”
72

70
When Advance America was a publicly traded corporation, it reported: “The day before the due date, we generally call the customer to confirm their payment due date.” Advance America, 2011 Annual Report (Form 10-K), at 11.

71
QC Holdings, 2014 Annual Report (Form 10-K), at 7. These statistics appear to also include QC's online payday loans, but the online portfolio was very small in 2014 (approximately 4.6 percent of revenue).

72
Instant Cash Advance introductory offer of a free (no fee) cash advance of $200,
http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php
.

Encouraging or requiring borrowers to return to the store on the due date provides lenders an opportunity to offer borrowers the option to roll over the loan or, where rollovers are prohibited by State law, to reborrow following repayment or after the expiration of any cooling-off period. Most storefront lenders examined by the Bureau employ monetary incentives that reward employees and store managers for loan volumes. Since as discussed below, a majority of loans result from rollovers of existing loans or reborrowing shortly after loans have been repaid, rollovers and reborrowing contribute substantially to employees' compensation. From confidential information gathered in the course of statutory functions, the Bureau is aware that rollover and reborrowing offers are made when consumers log into their accounts online, during “courtesy calls” made to remind borrowers of upcoming due dates, and when borrowers repay in person at storefront locations. In addition, some lenders train their employees to offer rollovers during courtesy calls even when borrowers responded that they had lost their jobs or suffered pay reductions.

Store personnel often encourage borrowers to roll over their loans or to reborrow, even when consumers have demonstrated an inability to repay their existing loans. In an enforcement action, the Bureau found that one lender maintained training materials that actively directed employees to encourage reborrowing by struggling borrowers. It further found that if a borrower did not repay or pay to roll over the loan on time, store personnel would initiate collections. Store personnel or collectors would then offer the option to take out a new loan to pay off their existing loan, or refinance or extend the loan as a source of relief from the potentially negative outcomes (
e.g.,
lawsuits, continued collections). This “cycle of debt” was depicted graphically as part of “The Loan Process” in the company's new hire training manual.
73

73
Press Release, Bureau of Consumer Fin. Prot.,
CFPB Takes Action Against ACE Cash Express for Pushing Payday Borrowers Into Cycle of Debt
(July 10, 2014),
http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/
.

In addition, though some States require lenders to offer extended repayment plans and some trade associations have designated provision of such plans as a best practice, individual lenders may often be reluctant to offer them. In Colorado, for instance, some payday lenders reported prior to a regulatory change in 2010 that they had implemented practices to restrict borrowers from obtaining the number of loans needed to be eligible for State-mandated extended payment plans under the previous regime or banned borrowers on plans from taking new loans.
74

The Bureau is also aware, from confidential information gathered in the course of statutory functions, that one or more lenders used training manuals that instructed employees not to mention these plans until after employees first offered rollovers, and then only if borrowers specifically asked about the plans. Indeed, details on implementation of the repayment plans that have been designated by two national trade associations for storefront payday lenders as best practices are unclear, and in some cases place a number of limitations on exactly how and when a borrower must request assistance to qualify for these “off-ramps.” For instance, one trade association claiming to represent more than half of all payday loan stores states that as a condition of membership, members must offer an “extended payment plan” but that borrowers must request the plan at least one day prior to the date on which the loan is due, generally in person at the store where the loan was made or otherwise by the same method used to originate the loan.
75

It also states that borrowers must request an extended payment plan at least one day prior to the date on which the loan is due and must return to the store where the loan was made to do so or request the plan by using the same method used to originate the loan.
76

Another trade association claiming over 1,300 members, including both payday lenders and firms that offer non-credit products such as check cashing and money transmission, states that members will provide the option of extended payment plans in the absence of State-mandated plans to customers unable to repay but details of the plans are not available on its Web site.
77

74
State of Colo. Dep't of Law,
2009 Deferred Deposit/Payday Lenders Annual Report,
at 2,
available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf
.
See
Market Concerns—Short-Term Loans below for additional discussion of lenders' extended payment plan practices.

75

About CFSA,
Cmty. Fin. Servs. Ass'n of America,
http://cfsaa.com/about-cfsa.aspx (last visited Jan. 15, 2016); CFSA Member Best Practices,
Cmty. Fin. Servs. Ass'n of America,
http://cfsaa.com/cfsa-member-best-practices.aspx (last visited
Jan. 15, 2016). Association documents direct lenders to display a “counter card” describing the association's best practices. Plans are to be offered in the absence of State-mandated plans at no charge and payable in four equal payments coinciding with paydays.

76

What Is an Extended Payment Plan?,
Cmty. Fin. Servs. Ass'n of America,
http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx
(last visited Jan. 15, 2016).

77

Membership,
Fin. Serv. Ctrs. of America,
http://www.fisca.org/AM/Template.cfm?Section=Membership
; Joseph M. Doyle,
Chairman's Message,
Fin. Serv. Ctrs. of America,
http://www.fisca.org/AM/Template.cfm?Section=Chairman_s_Message&Template=/CM/HTMLDisplay.cfm&ContentID=19222
(last visited Jan. 15, 2016);
FiSCA Best Practices,
Fin. Serv. Ctrs. of America,
http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm
(last visited Jan. 15, 2016);
Guidelines to Extended Payment Plan
, Fin. Serv. Ctrs. of America,
http://www.fisca.org/AM/Template.cfm?Section=Guidelines_to_Extended_Payment_Plan&Template=/MembersOnly.cfm&NavMenuID=642&ContentID=2249&DirectListComboInd=D
(last visited Jan. 15, 2016).

From confidential information gathered in the course of statutory functions and market outreach, the Bureau is aware that if a borrower fails to return to the store when a loan is due, the lender may attempt to contact the consumer and urge the consumer to make a cash payment before depositing the post-dated check that the consumer had provided at origination or electronically debiting the account. The Bureau is aware, from confidential information gathered in the course of its statutory functions and market outreach, that lenders may take various other actions to try to ensure that a payment will clear before presenting a check or ACH. These efforts may range from storefront lenders calling the borrower's bank to ask if a check of a particular size would clear the account or through the use of software offered by a number of vendors that attempts to model likelihood of repayment (“predictive ACH”).
78

If these attempts are unsuccessful, store personnel at either the storefront level or at a centralized

location will then generally engage in collection activity.

78
For example, Press Release, Clarity Servs.,
ACH Presentment Will Help Lenders Reduce Failed ACH Pulls
(Aug. 1, 2013),
https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/
;
Products,
Factor Trust,
http://ws.factortrust.com/products/ (last visited Apr. 8, 2016); Bank Account Verify Suite,
Microbilt,
http://www.microbilt.com/bank-account-verification.aspx (last visited Apr. 8, 2016); Sufficient Funds,
DataX,
http://www.dataxltd.com/ancillary-services/successful-collections/ (last visited Apr.8, 2016).

Collection activity may involve further in-house attempts to collect from the borrower's bank account.
79

If the first attempt fails, the lender may make subsequent attempts at presentment by splitting payments into smaller amounts in hopes of increasing the likelihood of obtaining at least some funds, a practice for which the Bureau recently took enforcement action against a small-dollar lender.
80

Or, the lender may attempt to present the payment multiple times, a practice that the Bureau has noted in supervisory examinations.
81

79
For example, one payday lender stated in its public documents that it “subsequently collects a large percentage of these bad debts by redepositing the customers' checks, ACH collections or receiving subsequent cash repayments by the customers.” First Cash Fin. Servs., 2014 Annual Report (Form 10-K), at 5 (Feb. 12, 2015), available at
https://www.sec.gov/Archives/edgar/data/840489/000084048915000012/fcfs1231201410-k.htm
.

80
Press Release, Bureau of Consumer Fin. Prot.,
CFPB Orders EZCORP to Pay $10 Million for Illegal Debt Collection Tactics
(Dec. 16, 2015),
http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/
.

81

See
Bureau of Consumer Fin. Prot.,
Supervisory Highlights,
at 20 (Spring 2014),
available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf
.

Eventually, the lender may attempt other means of collection. The Bureau is aware of in-house collections activities, either by storefront employees or by employees at a centralized collections division, including calls, letters, and visits to consumers and their workplaces,
82

as well as the selling of debt to third-party collectors.
83

The Bureau observed in its consumer complaint data that from November 2013 through December 2015 approximately 24,000 debt collection complaints had payday loan as the underlying debt. More than 10 percent of the complaints the Bureau has received about debt collection stem from payday loans.
84

82
Bureau of Consumer Fin. Prot.,
CFPB Compliance Bulletin 2015-07, In-Person Collection of Consumer Debt,
(Dec. 16, 2015),
http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf
.

83
For example, prior to discontinuing its payday lending operations, EZCorp indicated that it used a tiered structure of collections on defaulted loans (storefront employees, centralized collections, and then third-parties debt sales). EZCORP, Inc., 2014 Annual Report (Form 10-K) at 9 (Nov. 26, 2014),
available at https://www.sec.gov/Archives/edgar/data/876523/000087652314000102/a2014-10k9302014.htm
). Advance America utilized calls and letters to past-due consumers, as well as attempts to convert the consumer's check into a cashier's check, as methods of collection. Advance America, 2011 Annual Report (Form 10-K), at 11. For CFPB Consent orders, see ACE Cash Express, Inc., CFPB No. 2014-CFPB-0008, Consent Order (July 10, 2014),
available at
(
http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf
) and EZCorp, CFPB No. 2015-CFPB-0031, Consent Order (Dec. 16, 2015),
available at
(
http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf
).

84
Bureau of Consumer Fin. Prot.,
Monthly Complaint Report,
at 12 (March 2016),
http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.

Some payday lenders sue borrowers who fail to repay their loans. A study of small claims court cases filed in Utah from 2005 to 2010 found that 38 percent of cases were attributable to payday loans.
85

A recent news report found that the majority of non-traffic civil cases filed in 14 Utah small claims courts are payday loan collection lawsuits and in one justice court the percentage was as high as 98.8 percent.
86

In 2013, the Bureau entered into a Consent Order with a large national payday and installment lender based, in part, on the filing of flawed court documents in about 14,000 debt collection lawsuits.
87

85
Coalition of Religious Communities,
Payday Lenders and Small Claims Court Cases in Utah,
at 2,
available at http://www.consumerfed.org/pdfs/PDL-UTAH-court-doc.pdf.

86
Lee Davidson,
Payday Lenders Sued 7,927 Utahns Last Year,
The Salt Lake City Tribune (Dec. 20, 2015),
http://www.sltrib.com/home/3325528-155/payday-lenders-sued-7927-utahns-last
.

87
Press Release, Bureau of Consumer Fin. Prot.
Consumer Financial Protection Bureau Takes Action Against Payday Lender for Robo-Signing
(Nov. 20, 2013),
http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/
.

Business model.
As previously noted, the storefront payday industry has built a distribution model that involves a large number of small retail outlets, each serving a relatively small number of consumers. That implies that the overhead cost on a per consumer basis is relatively high.

Additionally, the loss rates on storefront payday loans—the percentage or amounts of loans that are charged off by the lender as uncollectible—are relatively high. Loss rates on payday loans often are reported on a per-loan basis but, given the frequency of rollovers and renewals, that metric understates the amount of principal lost to borrower defaults. For example, if a lender makes a $100 loan that is rolled over nine times, at which point the consumer defaults, the per-loan default rate would be 10 percent whereas the lender would have in fact lost 100 percent of the amount loaned. In this example, the lender would still have received substantial revenue, as the lender would have collected fees for each rollover prior to default. The Bureau estimates that during the 2011-2012 timeframe, charge-offs (
i.e.,
uncollectible loans defaulted on and never repaid) equaled nearly one-half of the average amount of outstanding loans during the year. In other words, for every $1.00 loaned, only $.50 in principal was eventually repaid.
88

One academic study found loss rates to be even higher.
89

88
Staff estimate based on public company financial statements and confidential information gathered in the course of the Bureau's statutory functions. Ratio of gross charged off loans to average balances, where gross charge-offs represent single-payment loan losses and average balance is the average of beginning and end of year single-payment loan receivables.

89
Mark Flannery and Katherine Samolyk, at 16 (estimating annual charge-offs on storefront payday loans at 66.6 percent of outstandings).

To sustain these significant costs, the payday lending business model is dependent upon a large volume of reborrowing—that is, rollovers, back-to-back loans, and reborrowing within a short period of paying off a previous loan—by those borrowers who do not default on their first loan. The Bureau's research found that over the course of a year, 90 percent of all loan fees comes from consumers who borrowed seven or more times and 75 percent comes from consumers who borrowed ten or more times.
90

Similarly, when the Bureau identified a cohort of borrowers and tracked them over ten months, the Bureau found that more than two-thirds of all loans were in sequences of at least seven loans, and that over half of all loans were in sequences of ten or more loans.
91

The Bureau defines a sequence as an initial loan plus one or more subsequent loans renewed within a period of time after repayment of the prior loan; a sequence thus captures not only rollovers and back-to-back loans but also re-borrowing that occurs within a short period of time after repayment of a prior loan either at the point at which a State-mandated cooling-off period ends or at the point at which the consumer, having repaid the prior loan, runs out of money.
92

90

CFPB Payday Loans and Deposit Advance Products White Paper,
at 22.

91

CFPB Report on Supplemental Findings,
at ch. 5.

92

CFPB Data Point: Payday Lending,
at 7. The Bureau's Data Point defined a sequence to encompass all loans made within 14 days of a prior loan. Other reports have proposed other definitions of sequence length including 30 days (Marc Anthony Fusaro & Patricia J. Cirillo,
Do Payday Loans Trap Consumers in a Cycle of Debt?,
at 12 (2011),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776&download=yes
) and sequences based on the borrower's pay period (nonPrime 101,
Report 7B: Searching for Harm in Storefront Payday Lending,
at 4 n.9 (2016),
available at https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf
.)
See
part Market Concerns—Short-Term Loans below for an additional discussion of these alternative definitions.

Other studies are broadly consistent. For example, a 2013 report based on

lender data from Florida, Kentucky, Oklahoma, and South Carolina found that 85 percent of loans were made to borrowers with seven or more loans per year, and 62 percent of loans were made to borrowers with 12 or more loans per year.
93

These four States have restrictions on payday loans such as cooling-off periods and limits on rollovers that are enforced by State-regulated databases, as well as voluntary extended repayment plans.
94

An updated report on Florida payday loan usage derived from the State database noted this trend has continued with 83 percent of payday loans in 2015 made to borrowers with seven or more loans and 57 percent of payday loans that same year made to borrowers with 12 or more loans.
95

Other reports have found that over 80 percent of total payday loans and loan volume is due to repeat borrowing within thirty days of a prior loan.
96

One trade association has acknowledged that “[i]n any large, mature payday loan portfolio, loans to repeat borrowers generally constitute between 70 and 90 percent of the portfolio, and for some lenders, even more.”
97

93
Montezemolo,
Payday Lending Abuses and Predatory Practices,
at 13 tbl. 7.

94

Id.
at 12. For additional information on Florida loan use, see Veritec Solutions LLC,
State of Florida Deferred Presentment Program Through May 2012,
(2012),
available at http://geerservices.net/veritecs.com/wp-content/uploads/2013/07/2012-FL-Trend-Report1.pdf
.

95
Brandon Coleman & Delvin Davis, Ctr. for Responsible Lending,
Perfect Storm: Payday Lenders Harm Florida Consumer Despite State Law,
at 4 (March 2016),
available
at
http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf
.

96
Parrish & King, at 11-12.

97
Letter from Hilary B. Miller, Esq. on behalf of Cmty. Fin. Servs. Ass'n. of America, to Bureau of Consumer Fin. Prot.,
Petition of Community Financial Services Association of America, Ltd. For Retraction of “Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings,
at 5 (June 20, 2013),
available
at
http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf
.

Market Concerns—Short-Term Loans below discusses the impact of these outcomes for consumers who are unable to repay and either default or reborrow.

Recent regulatory and related industry developments.
A number of Federal and State regulatory developments have occurred over the last 15 years as concerns about the effects of payday lending have spread. Regulators have found that the industry has tended to shift to new models and products in response.

Since 2000, it has been clear from commentary added to Regulation Z, that payday loans constitute “credit” under the Truth in Lending Act (TILA) and that cost of credit disclosures are required to be provided in payday loan transactions, regardless of how State law characterizes payday loan fees.
98

98
12 CFR 1026.2(a)(14)-2.

In 2006, Congress enacted the Military Lending Act (MLA) to address concerns that servicemembers and their families were becoming over-indebted in high-cost forms of credit.
99

The MLA, as implemented by the Department of Defense's regulation, imposes two broad classes of requirements applicable to a creditor. First, the creditor may not impose a military annual percentage rate
100

(MAPR) greater than 36 percent in connection with an extension of consumer credit to a covered borrower. Second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information, both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account, refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit, and refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit. In 2007, the Department of Defense issued its initial regulation under the MLA, limiting the Act's application to closed-end loans with a term of 91 days or less in which the amount financed did not exceed $2,000; closed-end vehicle title loans with a term of 181 days or less; and closed-end tax refund anticipation loans.
101

However, the Department found that evasions developed in the market as “the extremely narrow definition of `consumer credit' in the [then-existing rule] permits a creditor to structure its credit products in order to reduce or avoid altogether the obligations of the MLA.”
102

99
The Military Lending Act, part of the John Warner National Defense Authorization Act for Fiscal Year 2007, was signed into law in October 2006. The interest rate cap took effect October 1, 2007.
See
10 U.S.C. 987.

100
The military annual percentage rate is an “all-in” APR that includes a broader range of fees and charges than the APR that must be disclosed under the Truth in Lending Act.
See
32 CFR 232.4.

101
72 FR 50580 (Aug. 31, 2007).

102
80 FR 43560, 43567 n.78 (July 22, 2015).

As a result, effective October 2015 the Department of Defense expanded its definition of covered credit to include open-end credit and longer-term loans so that the MLA protections generally apply to all credit subject to the requirements of Regulation Z of the Truth in Lending Act, other than certain products excluded by statute.
103

In general, creditors must comply with the new regulations for extensions of credit after October 3, 2016; for credit card accounts, creditors are required to comply with the new rule starting October 3, 2017.
104

103
80 FR 43560 (July 22, 2015) (to be codified at 32 CFR Pt. 232),
available at https://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf
.

104

Id.

At the State level, the last States to enact legislation authorizing payday lending, Alaska and Michigan, did so in 2005.
105

At least eight States that previously had authorized payday loans have taken steps to restrict or eliminate payday lending. In 2001, North Carolina became the first State that had previously permitted payday loans to adopt an effective ban by allowing the authorizing statute to expire. In 2004, Georgia also enacted a law banning payday lending.

105
Alaska Stat. §§ 06.50.010 through 06.50.900; Mich. Comp. Laws §§ 487.2121 through 487.2173.

In 2008, the Ohio legislature adopted the Short Term Lender Act with a 28 percent APR cap, including all fees and charges, for short-term loans and repealed the existing Check-Cashing Lender Law that authorized higher rates and fees.
106

In a referendum later that year, Ohioans voted against reinstating the Check-Cashing Lender Law, leaving the 28 percent APR cap and the Short Term Lending Act in effect.
107

After the vote, some payday lenders began offering vehicle title loans. Other lenders continued to offer payday loans utilizing Ohio's Credit Service Organization Act
108

and the Mortgage Loan Act;
109

the latter practice was upheld by the State Supreme Court in 2014.
110

106
Ohio Rev. Code §§ 1321.35 and 1321.40.

107

Ohio Neighborhood Fin., Inc.
v.
Scott,
139 Ohio St.3d 536, 2014-Ohio-2440, at 4-7,
available at https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2014/2014-ohio-2440.pdf (reported at
13 NE.3d 1115).

108
Ohio Rev. Code, Ch. § 4712.01.

109
Ohio Rev. Code, Ch. § 1321.52(C).

110

See generally Ohio Neighborhood Fin., Inc.
v.
Scott,
139 Ohio St.3d 536, 2014-Ohio-2440.

In 2010, Colorado's legislature banned short-term single-payment balloon loans in favor of longer-term, six-month loans. Colorado's regulatory framework is described in more detail in the discussion of payday installment lending below.

As of July 1, 2010, Arizona effectively prohibited payday lending after the authorizing statute expired and a statewide referendum that would have continued to permit payday lending failed to pass.
111

However, small-dollar

lending activity continues in the State. The State financial regulator issued an alert in 2013, in response to complaints about online unlicensed lending, advising consumers and lenders that payday and consumer loans of $1,000 or less are generally subject to a rate of 36 percent per annum and loans in violation of those rates are void.
112

In addition, vehicle title loans continue to be made in Arizona as secondary motor vehicle finance transactions.
113

The number of licensed vehicle title lenders has increased by about 300 percent since the payday lending law expired and now exceeds the number of payday lenders that were licensed prior to the ban.
114

111
Ariz. Rev. Stat. § 6-1263; Ariz. Sec'y of State,
State of Arizona Official Canvass,
at 15 (2008),

available at http://apps.azsos.gov/election/2008/General/Canvass2008GE.pdf
; Arizona Attorney General's Office,
Operation Sunset FAQ, available at https://www.azag.gov/sites/default/files/sites/all/docs/consumer/op-sunset-FAQ.pdf
.

112
Regulatory and Consumer Alert CL/CO-13-01 from Ariz. Dep't of Fin. Insts., to Consumers; Financial Institutions and Enterprises Conducting Business in Arizona, Arizona Department of Financial Institutions,
Regulatory and Consumer Alert, CL/CO-13-01, Unlicensed Consumer Lending Transactions
(Feb. 7, 2013),
http://www.azdfi.gov/LawsRulesPolicy/Forms/FE-AD-PO-Regulatory_and_Consumer_Alert_CL_CO_13_01%2002-06-2013.pdf

113
Ariz. Rev. Stat. §§ 44-281 and 44-291;
Frequently Asked Questions from Licensees, Question #6 “What is a Title Loan,”
Arizona Dept. of Fin. Insts.,
http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC
(last visited Apr. 20, 2016).

114
These include loans “secured” by borrowers' registrations of encumbered vehicles. Jean Ann Fox, Kelly Griffith, Tom Feltner, Consumer Fed'n of America and Ctr. for Econ. Integrity,
Wrong Way: Wrecked by Debt,
at 6, 8-9 (2016),
available at http://consumerfed.org/wp-content/uploads/2016/01/160126_wrongway_report_cfa-cei.pdf
.

In 2009, Virginia amended its payday lending law. It extended the minimum loan term to the length of two income periods, added a 45-day cooling-off period after substantial time in debt (the fifth loan in a 180-day period) and a 90-day cooling-off period after completing an extended payment plan, and implemented a database to enforce limits on loan amounts and frequency. The payday law applies to closed-end loans. Virginia has no interest rate regulations or licensure requirements for open-end credit.
115

After the amendments, a number of lenders that were previously licensed as payday lenders in Virginia and that offer closed-end payday loans in other States now operate in Virginia by offering open-end credit without a State license.
116

115
Va. Code Ann. § 6.2-312.

116

See, e.g., What We Offer,
CashNetUSA,
https://www.cashnetusa.com/what-we-offer.html
(Nov. 15, 2015). CashNetUSA is part of Enova,
https://www.enova.com/brands-services/cashnetusa/
(Nov. 15, 2015); Check Into Cash,
https://checkintocash.com/virginia-line-of-credit/
(Nov. 15, 2015); Allied Cash Advance (“VA: Loans made through open-end credit account.”)
https://www.alliedcash.com/
(Nov. 15, 2015); Community Choice Financial through First Virginia Financial Services,
http://www.firstvirginialoans.com/loan-options/
(Nov. 15, 2015) (First Virginia is part of Community Choice, see “Our Brands”
http://ccfi.com/news/
(Nov. 15, 2015). For a list of payday lender license surrenders and dates of surrender, see
https://www.scc.virginia.gov/SCC-INTERNET/bfi/reg_inst/sur/pay_sur_0112.pdf
(Nov. 15, 2015).

Washington and Delaware have restricted repeat borrowing by imposing limits on the number of payday loans consumers may obtain. In 2009, Washington made several changes to its payday lending law. These changes, effective January 1, 2010, include a cap of eight loans per borrower from all lenders in a rolling 12-month period where there had been no previous limit on the number of total loans, an extended repayment plan for any loan, and a database to which that lenders are required to report all payday loans.
117

In 2013, Delaware, a State with no fee restrictions for payday loans, implemented a cap of five payday loans, including rollovers, in any 12-month period.
118

Delaware defines payday loans as loans due within 60 days for amounts up to $1,000. Some Delaware lenders have shifted from payday loans to longer-term installment loans with interest-only payments followed by a final balloon payment of the principal and an interest fee payment—sometimes called a “flexpay” loan.
119

117
Wash., Dep't of Fin. Insts.,
2010 Payday Lending Report,
at 3,
available at http://www.dfi.wa.gov/sites/default/files/reports/2010-payday-lending-report.pdf
.

118
Del. Code Ann. 5 §§ 2227(7), 2235A(a)(1).

119

See, e.g., James
v.
National Financial, LLC,
No. C.A. 8931-VCL at 8, 65-67 (Del. Ch. Mar. 14, 2016),
available at http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery
(reported at 132 A.3d 799).

At least 35 Texas municipalities have adopted local ordinances setting business regulations on payday lending (and vehicle title lending).
120

Some of the ordinances, such as those in Dallas, El Paso, Houston, and San Antonio, include requirements such as limits on loan amounts (no more than 20 percent of the borrower's gross annual income for payday loans), limits on the number of rollovers, required amortization of the principal loan amount for repeat loans—usually in 25 percent increments, record retention for at least three years, and a registration requirement.
121

On a statewide basis, there are no Texas laws specifically governing payday lenders or payday loan terms; credit access businesses that act as loan arrangers or broker payday loans (and vehicle title loans) are regulated and subject to licensing, reporting, and requirements to provide consumers with disclosures about repayment and reborrowing rates.
122

120
A description of the municipalities is available at Texas Municipal League. An additional 15 Texas municipalities have adopted land use ordinances on payday or vehicle title lending.
City Regulation of Payday and Auto Title Lenders,
Tex. Mun. League,
http://www.tml.org/payday-updates
(last visited May 6, 2016).

121
Other municipalities have adopted similar ordinances. For example, at least seven Oregon municipalities, including Portland and Eugene, have enacted ordinances that include a 25 percent amortization requirement on rollovers and a requirement that lenders offer a no-cost payment plan after two rollovers. Portland, Or., Code § 7.26.050, Eugene Or., Code § 3.556.

122
CABs must include a pictorial disclosure with the percentage of borrowers who will repay the loan on the due date and the percentage who will roll over (called renewals) various times.
See
State of Texas, Consumer Disclosure,
Payday Loan-Single Payment, available at http://occc.texas.gov/sites/default/files/uploads/disclosures/cab-disclosure-payday-single-011012.pdf
. The CABs, rather than the lenders, maintain storefront locations, and qualify borrowers, service and collect the loans for the lenders. CABs may also guaranty the loans. There is no cap on CAB fees and when these fees are included in the loan finance charges, the disclosed APRs for Texas payday and vehicle title loans are similar to those in other States with deregulated rates.
See
Ann Baddour,
Why Texas' Small Dollar Lending Market Matter,
12 e-Perspectives Issue 2 (2012),
available at https://www.dallasfed.org/microsites/cd/epersp/2012/2_2.cfm.
In 2004, a Federal appellate court dismissed a putative class action related to these practices.
Lovick
v.
RiteMoney, Ltd.,
378 F.3d 433 (5th Cir. 2004).

Online Payday and Hybrid Payday Loans

With the growth of the internet, a significant online payday lending industry has developed. Some storefront lenders use the internet as an additional method of originating payday loans in the States in which they are licensed to do business. In addition, there are now a number of lenders offering payday, and what are referred to as “hybrid” payday loans, exclusively through the internet. Hybrid payday loans are structured so that rollovers occur automatically unless the consumer takes affirmative action to pay off the loan, thus effectively creating a series of interest-only payments followed by a final balloon payment of the principal amount and an additional fee.
123

Hybrid loans with automatic rollovers would fall within the category of “covered longer-term loans” under the proposed rule as discussed more fully below.

123
nonPrime101,
Report 1: Profiling Internet Small Dollar Lending- Basic Demographics and Loan Characteristics,
at 2-3, (2014),
available at https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf
. The report refers to these automatic rollovers as “renewals.”

Industry size, structure, and products.
The online payday market size is difficult to measure for a number of reasons. First, many online lenders offer a variety of products including single-

payment loans (what the Bureau refers to as payday loans), longer-term installment loans, and hybrid loans; this poses challenges in sizing the portion of these firms' business that is attributable to payday and hybrid loans. Second, many online payday lenders are not publicly traded, resulting in little available financial information about this market segment. Third, many other online payday lenders claim exemption from State lending laws and licensing requirements, stating they are located and operated from other jurisdictions.
124

Consequently, these lenders report less information publicly, whether individually or in aggregate compilations, than lenders holding traditional State licenses. Finally, storefront payday lenders who are also using the online channel generally do not separately report their online originations. Bureau staff's reviews of the largest storefront lenders' Web sites indicate an increased focus in recent years on online loan origination.

124
For example, in 2015 the Bureau filed a lawsuit in Federal district court against NDG Enterprise, NDG Financial Corp., Northway Broker, Ltd., and others alleging that defendants illegally collected online payday loans that were void or that consumers had no obligations to repay, and falsely threatened consumers with lawsuits and imprisonment. Several defendants are Canadian corporations and others are incorporated in Malta. The case is pending.
See
Press Release, Bureau of Consumer Fin. Prot.,
CFPB Sues Offshore Payday Lender
(Aug. 4, 2015),
http://www.consumerfinance.gov/newsroom/cfpb-sues-offshore-payday-lender/
.

With these caveats, a frequently cited industry analyst has estimated that by 2012 online payday loans had grown to generate nearly an equivalent amount of fee revenue as storefront payday loans on roughly 62 percent of the origination volume, about $19 billion, but originations had then declined somewhat to roughly $15.9 billion during 2015.
125

This trend appears consistent with storefront payday loans, as discussed above, and is likely related at least in part to increasing lender migration from short-term into longer-term products. Online payday loan fee revenue has been estimated for 2015 at $3.1 billion, or 19 percent of origination volume.
126

However, these estimates may be both over- and under-inclusive; they may not differentiate precisely between online lenders' short-term and longer-term loans, and they may not account for the online lending activities by storefront payday lenders.

125
Hecht,
The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation;
John Hecht, Jefferies LLC,
The State of Short-Term Credit in a Constantly Changing Environment
(2015); Jessica Silver-Greenberg, The New York Times,
Major Banks Aid in Payday Loans Banned by States
(Feb. 23, 2013)
http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html
.

126
Hecht,
The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation.

Whatever its precise size, the online industry can broadly be divided into two segments: online lenders licensed in the State in which the borrower resides and lenders that are not licensed in the borrower's State of residence.

The first segment consists largely of storefront lenders with an online channel to complement their storefronts as a means of originating loans, as well as a few online-only payday lenders who lend only to borrowers in States where they have obtained State lending licenses. Because this segment of online lenders is State-licensed, State administrative payday lending reports include this data but generally do not differentiate loans originated online from those originated in storefronts. Accordingly, this portion of the market is included in the market estimates summarized above, and the lenders consider themselves to be subject to, or generally follow, the relevant State laws discussed above.

The second segment consists of lenders that claim exemption from State lending laws. Some of these lenders claim exemption because their loans are made from a physical location outside of the borrower's State of residence, including from an off-shore location outside of the United States. Other lenders claim exemption because they are lending from tribal lands, with such lenders claiming that they are regulated by the sovereign laws of federally recognized Indian tribes.
127

These lenders claim immunity from suit to enforce State or Federal consumer protection laws on the basis of their sovereign status.
128

A frequently cited source of data on this segment of the market is a series of reports using data from a specialty consumer reporting agency serving certain online lenders, most of whom are unlicensed.
129

These data are not representative of the entire online industry, but nonetheless cover a large enough sample (2.5 million borrowers over a period of four years) to be significant. These reports indicate the following concerning this market segment:

127
According to a tribal trade association representative, about 30 tribes are involved in the payday lending industry. Julia Harte & Joanna Zuckerman Bernstein, AlJazeera America,
Payday Nation
(June 17, 2014)
http://projects.aljazeera.com/2014/payday-nation/.
The Bureau is unaware of other public sources for an estimate of the number of tribal lenders.

128

See
Great Plains Lending, L.L.C., CFPB No. 2013-MISC-Great Plains Lending-0001 (2013),
available at http://files.consumerfinance.gov/f/201309_cfpb_decision-on-petition_great-plains-lending-to-set-aside-civil-investigative-demands.pdf
(Sept. 26, 2013); First Amended Complaint,
Consumer Financial Protection Bureau
v.
CashCall, Inc. No. 13-cv-13167, 2014 WL 10321537 (D. Mass. March 21, 2014), available at http://files.consumerfinance.gov/f/201403_cfpb_amended-complaint_cashcall.pdf
; Order, Fed. Trade Comm'n v. AMG Services, Inc., No. 12-cv-00536, 2014 WL 910302 (D. Nev. Mar. 07, 2014),
available at https://www.ftc.gov/system/files/documents/cases/140319amgorder.pdf
; State
ex rel. Suthers
v.
Cash Advance & Preferred Cash Loans, 205 P.3d 389 (Colo. App. 2008), aff'd sub nom; Cash Advance & Preferred Cash Loans
v.
State,
242 P.3d 1099 (Colo. 2010);
California
v.
Miami Nation Enterprises et a
l., 166 Cal.Rptr.3d 800 (2014).

129
nonPrime101,
Report 1,
at 9.

• Although the mean and median loan size among the payday borrowers in this data set are only slightly higher than the information reported above for storefront payday loans,
130

the online payday lenders charge higher rates than storefront lenders. As noted above, most of the online lenders reporting this data claim exemption from State laws and do not comply with State rate caps. The median loan fee in this data set is $23.53 per $100 borrowed, compared to $15 per $100 borrowed for storefront payday loans. The mean fee amount is even higher at $26.60 per $100 borrowed.
131

Another study based on a similar dataset from three online payday lenders is generally consistent, putting the range of online payday loan fees at between $18 and $25 per $100 borrowed.
132

130
The median online payday loa

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-13490. Public record. Not legal advice.