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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2017-21808

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** November 17, 2017
- **Citation:** 82 FR 54472

## 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:

Final rule; official interpretations.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau or CFPB) is issuing this final rule establishing regulations creating consumer protections for certain consumer credit products and the official interpretations to the rule. First, the rule identifies it as an unfair and abusive practice for a lender to make covered short-term or longer-term balloon-payment loans, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay the loans according to their terms. The rule exempts certain loans from the underwriting criteria prescribed in the rule if they have specific consumer protections. Second, for the same set of loans along with certain other high-cost longer-term loans, the rule identifies it as an unfair and abusive practice to make attempts to withdraw payment from consumers' accounts after two consecutive payment attempts have failed, unless the consumer provides a new and specific authorization to do so. Finally, the rule prescribes notices to consumers before attempting to withdraw payments from their account, as well as processes and criteria for registration of information systems, for requirements to furnish and obtain information from them, and for compliance programs and record retention. The rule prohibits evasions and operates as a floor leaving State and local jurisdictions to adopt further regulatory measures (whether a usury limit or other protections) as appropriate to protect consumers.

DATES:

Effective Date:
This regulation is effective January 16, 2018.
Compliance Date:
Sections 1041.2 through 1041.10, 1041.12, and 1041.13 have a compliance date of August 19, 2019.

Application Deadline:
The deadline to submit an application for preliminary approval for registration pursuant to § 1041.11(c)(1) is April 16, 2018.

FOR FURTHER INFORMATION CONTACT:

Sarita Frattaroli, Counsel; Mark Morelli, Michael G. Silver, Steve Wrone, Senior Counsels; Office of Regulations; Consumer Financial Protection Bureau, at 202-435-7700 or
cfpb_reginquiries@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

On June 2, 2016, the Bureau issued proposed consumer protections for payday loans, vehicle title loans, and certain high-cost installment loans. The proposal was published in the
Federal Register
on July 22, 2016.
1

Following a public comment period and review of comments received, the Bureau is now issuing this final rule with consumer protections governing the underwriting of covered short-term and longer-term balloon-payment loans, including payday and vehicle title loans. The rule also contains disclosure and payment withdrawal attempt requirements for covered short-term loans, covered longer-term balloon-payment loans, and certain high-cost covered longer-term loans.

1
Payday, Vehicle Title, and Certain High-Cost Installment Loans, 81 FR 47864 (July 22, 2016).

Covered short-term 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 issues these regulations primarily pursuant to its authority under section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to identify and prevent unfair, deceptive, or abusive acts or practices.
2

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 Federal consumer financial laws,
3

section 1024 of the Dodd-Frank Act to facilitate supervision of certain non-bank financial service providers,
4

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.
5

2
Public Law 111-203, section 1031(b), 124 Stat. 1376 (2010) (hereinafter Dodd-Frank Act).

3
Dodd-Frank Act section 1022(b).

4
Dodd-Frank Act section 1024(b)(7).

5
Dodd-Frank Act section 1032(a).

The Bureau is not, at this time, finalizing the ability-to-repay determination requirements proposed for certain high-cost installment loans, but it is finalizing those requirements as to covered short-term and longer-term balloon-payment loans. The Bureau is also finalizing certain disclosure, notice, and payment withdrawal attempt requirements as applied to covered short-term loans, longer-term balloon-payment loans, and high-cost longer-term loans at this time.

The Bureau is concerned that lenders that make covered short-term 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 according to their terms and by engaging in harmful practices in the course of seeking to withdraw payments from consumers' accounts. The Bureau has concluded that there is consumer harm in connection with these practices because many consumers struggle to repay unaffordable loans and in doing so suffer a variety of adverse consequences. In particular, many consumers who take out these 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 (“re-borrow”), default on the covered loan, or make the payment on the covered loan and fail to meet basic living expenses or other major financial obligations. As a result of these dynamics, a substantial population of consumers ends up in extended loan sequences of unaffordable loans. Longer-term balloon-payment loans, which are less common in the marketplace today, raise similar risks.

In addition, 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 their accounts. In these circumstances, further attempts to withdraw funds from consumers' accounts are very unlikely to succeed, yet they clearly result in further harms to consumers.

A. Scope of the Rule

The rule applies to two types of covered loans. First, it applies 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, and longer-term balloon-payment loans. The underwriting portion of the rule applies to these loans. Second, certain parts of the rule apply to longer-term loans with terms of more than 45 days that have (1) a cost of credit that exceeds 36 percent per annum; and (2) a form of “leveraged

payment mechanism” that gives the lender a right to withdraw payments from the consumer's account. The payments part of the rule applies to both categories of loans. The Bureau had proposed parallel underwriting requirements for high-cost covered longer-term loans. However, at this time, the Bureau is not finalizing the ability-to-repay portions of the rule as to covered longer-term loans other than those with balloon payments.

The rule excludes or exempts several types of consumer credit, 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; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration); and (10) accommodation loans.

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

The rule identifies it as an unfair and abusive practice for a lender to make covered short-term or longer-term balloon-payment loans without reasonably determining that the consumers will have the ability to repay the loans according to their terms. The rule prescribes requirements to prevent this practice and thus the specific harms to consumers that the Bureau has identified as flowing from the practice, including extended loan sequences for a substantial population of consumers.

The first set of requirements addresses the underwriting of these loans. A lender, before making a covered short-term or longer-term balloon-payment loan, must 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 basic living expenses and other major financial obligations without needing to re-borrow over the ensuing 30 days. Specifically, a lender is required to:

• Verify the consumer's net monthly income using a reliable record of income payment, unless a reliable record is not reasonably available;

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

• Verify the consumer's monthly housing costs using a national consumer report if possible, or otherwise rely on the consumer's written statement of monthly housing expenses;

• Forecast a reasonable amount for basic living expenses, other than debt obligations and housing costs; and

• Determine the consumer's ability to repay the loan based on the lender's projections of the consumer's residual income or debt-to-income ratio.

Furthermore, a lender is prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other, for 30 days after the third loan is no longer outstanding.

Second, and in the alternative, a lender is allowed to make a covered short-term loan without meeting all the specific underwriting criteria set out above, as long as the loan satisfies certain prescribed terms, the lender confirms that the consumer meets specified borrowing history conditions, and the lender provides required disclosures to the consumer. Among other conditions, under this alternative approach, a lender is 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 is not 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 is not permitted to take vehicle security in connection with loans that are made according to this alternative approach.

C. Payment Practices Rules

The rule identifies it as an unfair and abusive practice for a lender to make attempts to withdraw payment from consumers' accounts in connection with a short-term, longer-term balloon-payment, or high-cost longer-term loan after the lender's second consecutive attempts to withdraw payments from the accounts from which the prior attempts were made have failed due to a lack of sufficient funds, unless the lender obtains the consumers' new and specific authorization to make further withdrawals from the accounts. The Bureau found that in these circumstances, further attempted withdrawals are highly unlikely to succeed, but clearly impose harms on consumers who are affected. This prohibition on further withdrawal attempts applies 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 rule requires that lenders must 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 is required to provide a written notice, depending on means of delivery, a certain number of days before its first attempt to withdraw payment for a covered loan from a consumer's checking, savings, or prepaid account or before an attempt to withdraw such payment in a different amount than the regularly scheduled payment amount, on a date other than the regularly scheduled payment date, by a different payment channel than the prior payment, or to re-initiate a returned prior transfer. The notice must contain key information about the upcoming payment attempt and, if applicable, alert the consumer to unusual payment attempts. A lender is permitted to provide electronic notices as long as the consumer consents to electronic communications.

D. Additional Requirements

The rule requires lenders to furnish to provisionally registered and registered information systems certain information concerning covered short-term and longer-term balloon-payment loans at loan consummation, during the period that the loan is an outstanding loan, and when the loan ceases to be an outstanding loan. To be eligible to become a provisionally registered or registered information system, an entity must satisfy the eligibility criteria prescribed in the rule. The rule provides for a registration process that will allow information systems to be registered, and lenders to be ready to furnish required information, at the time the furnishing obligation in the rule takes effect. Consumer reports provided by registered information systems will include a reasonably comprehensive record of a consumer's recent and current use of covered short-term and longer-term balloon-payment loans. Before making covered short-term and longer-term balloon-payment loans, a lender is required to obtain and consider a consumer report from a registered information system.

A lender is required to establish and follow a compliance program and retain certain records. A lender is also required to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements in this rule. Furthermore, a lender is required to retain the loan agreement and documentation obtained for any covered loan or an image thereof, as well as electronic records in tabular format regarding origination calculations and determinations for a short-term or longer-term balloon-payment loan, and regarding loan type and terms. The rule also includes an anti-evasion clause to address the kinds of concerns the Bureau noted in connection with the evasive actions that lenders in this market took in response to the regulations originally adopted on loans made to servicemembers under the Military Lending Act.

E. Effective and Compliance Dates/Application Deadline
6

6
The description of effective dates in this document differs from the description of effective dates in the final rule as issued on the Bureau's Web site on October 5, 2017, which provided that the regulation would be effective 21 months after date of publication in the
Federal Register
, except for § 1041.11, which would be effective 60 days after date of publication in the
Federal Register
. The rule published in the
Federal Register
provides that, for purposes of codification in the Code of Federal Regulations, this regulation is effective 60 days after date of publication in the
Federal Register
. Sections 1041.2 through 1041.10, 1041.12, and 1041.13 have a compliance date of 21 months after date of publication in the
Federal Register
. This change is a technical correction to allow for clear cross-references within sections in the Code of Federal Regulations. It is not substantive and does not affect the dates by which regulated entities must comply with sections of the regulation.

Other minor technical corrections and clarifications have been made to the final rule as issued on the Bureau's Web site on October 5, 2017. To the extent that section 553 of the Administrative Procedure Act (APA), 5 U.S.C. 553, applies, there is good cause to publish all of these changes without notice and comment. Under the APA, notice and opportunity for public comment are not required if the Bureau finds that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest. 5 U.S.C. 553(b)(B). The Bureau has determined that notice and comment are unnecessary because the technical corrections in this final rule allow for proper formatting in the Code of Federal Regulations, correct inadvertent technical errors, and align and harmonize provisions of the regulation. These changes are routine and insignificant in nature and impact, and do not change the scope of the rule or regulatory burden. Therefore, the technical corrections are adopted in final form.

The final rule will become effective January 16, 2018, 60 days after publication of the final rule in the
Federal Register
. Compliance with §§ 1041.2 through 1041.10, 1041.12, and 1041.13 will be required beginning August 19, 2019, 21 months after publication of the final rule in the
Federal Register
. The deadline to submit an application for preliminary approval for registration pursuant to § 1041.11(c)(1) will be April 16, 2018, 150 days after publication of the final rule in the
Federal Register
. The effective and compliance dates and application deadline are structured 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 ($10.3 trillion in outstanding balances), for student loans ($1.4 trillion), and for auto loans ($1.1 trillion). This is also one way in which certain types of open-end credit—including home equity loans ($0.13 trillion) and lines of credit ($0.472 trillion)—and at least some credit cards and revolving credit ($1.0 trillion)—can be used.
7

7

See
Bd. of Governors of the Fed. Reserve Sys., “Mortgage Debt Outstanding (Table 1.54),” (June 2017) (mortgages (one- to four-family)),
available at http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm;
Bd. of Governors of the Fed. Reserve Sys., “Consumer Credit—G.19: July 2017,” (Sept. 8, 2017) (student loans, auto loans, and revolving credit),
available at
h
ttps://www.federalreserve.gov/releases/g19/current/default.htm;
Experian-Oliver Wyman, “2017 Q2 Market Intelligence Report: Home Equity Loans Report,” at 16 fig. 21 (2017) and Experian-Oliver Wyman, “2017 Q2 Market Intelligence Report: Home Equity Lines Report,” at 21 fig. 30 (2017) (home equity loans and lines of credit outstanding estimates),
available at http://www.marketintelligencereports.com.

In addition to the credit markets described above, consumers living paycheck to paycheck and with little to no savings have also used credit as a means of coping with financial shortfalls. These shortfalls may be due to mismatched timing between income and expenses, misaligned cash flows, income volatility, unexpected expenses or income shocks, or expenses that simply exceed income.
8

According to a recent survey conducted by the Board of Governors of the Federal Reserve System (Federal Reserve Board), 44 percent of adults reported they would either be unable to cover an emergency expense costing $400 or would have to sell something or borrow money to cover it, and 30 percent reported that they found it “difficult to get by” or were “just getting by” financially.
9

Whatever the cause of these financial shortfalls, consumers in these situations sometimes seek what may broadly be termed a “liquidity loan.”
10

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.

8

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

9
Bd. of Governors of the Fed. Reserve Sys., “Report on the Economic Well-Being of U.S. Households in 2016,” at 2, 8 (May 2017),
available at https://www.federalreserve.gov/publications/files/2016-report-economic-well-being-us-households-201705.pdf.

10
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.

11

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.
12

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 excluding non-recourse possessory pawn loans, as described in proposed § 1041.3(e)(5), from the scope of this rulemaking.

11
Credit cards and deposit overdraft services would have been excluded from the proposed rule under proposed § 1041.3(e)(3) and (6) as discussed further below. On October 5, 2016, the Bureau released a final rule on prepaid accounts. Among other things, the rule regulates overdraft credit features offered in connection with prepaid accounts, and generally covers under Regulation Z's credit card rules any such credit feature that is offered by the prepaid account issuer, its affiliate, or its business partner where credit can be accessed in the course of a transaction conducted with a prepaid card. 81 FR 83934 (Nov. 22, 2016). The Bureau later published a final rule delaying the October 1, 2017, effective date of that rule by six months, to April 1, 2018. 82 FR 18975 (Apr. 25, 2017). In preparation for a potential rulemaking regarding possible consumer protection concerns with overdraft programs on checking accounts, the Bureau issued the Notice and Request for Information on the Impacts of Overdraft Programs on Consumers, 77 FR 12031 (Feb. 28, 2012);
see
Kelly Cochran, “Spring 2017 Rulemaking Agenda,” CFPB Blog (July 20, 2017),
available at https://www.consumerfinance.gov/about-us/blog/spring-2017-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),
available at https://www.consumerfinance.gov/about-us/blog/new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/.
The $11.16 billion total does not include credit union overdraft 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),
available at http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf.
The Federal Reserve Board has adopted a set of regulations of overdraft services.
See
Electronic Fund Transfers, 75 FR 31665 (June 4, 2010). In addition, the Bureau has published three research reports on overdraft.
See
Bureau of Consumer Fin. Prot., “Data Point: Frequent Overdrafters” (2017),

available at http://

files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf;

Bureau of Consumer Fin. Prot., “Data Point: Checking Account Overdraft” (2014),
available at http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf;
Bureau of Consumer Fin. Prot., “CFPB Study of Overdraft Programs: A White Paper of Initial Data Findings” (2013),
available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf
(hereinafter “
CFPB Study of Overdraft Programs White Paper”
).

12
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 (Jan. 15, 2012),
available at https://my.vanderbilt.edu/susancarter/files/2011/07/Carter_Susan_JMP_Web site2.pdf.
The two largest pawn firms, EZCORP and FirstCash, account for about 13 percent of approximately 13,000 pawn storefronts. The remaining storefronts are operated by small, independent firms. EZCORP, “Investor Update: Business Transformation Delivering Results,” at 7 (Mar. 7, 2017),
available at http://investors.ezcorp.com/download/Investor+Presentation_030717.pdf.
FirstCash, Inc., is the company resulting from the September 2016 merger of FirstCash Financial Services and Cash America. FirstCash operates in 26 States. FirstCash, Inc., 2016 Annual Report (Form 10-K), at 1 (Mar. 1, 2017).
See generally,
John P. Caskey, “Fringe Banking: Cash-Checking Outlets, Pawnshops, and the Poor,” at Chapter 2 (New York: Russell Sage Foundation 1994).

This rulemaking is focused on two general categories of liquidity loan products: (1) Short-term loans and longer-term balloon-payment loans; and (2) with regard to payment practices, a broader set of liquidity loan products that also includes certain higher-cost longer-term installment 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 final rule's underwriting requirements also apply to depository advance products and other loans of 45 days or less in duration, as well as certain longer-term balloon-payment loans that generally involve a series of small, often interest-only, payments followed by a single final large lump sum payment. The final rule's payment presentment requirements apply to short-term and longer-term balloon-payment products, as well as to certain higher-cost longer-term installment loans. That latter category includes 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 having the ability to automatically collect payments from an account into which the income payment is deposited. In addition, the latter category includes certain high-cost installment loans made by more traditional finance companies.

This rulemaking includes both closed-end loans and open-end lines of credit.
13

As described in the section-by-section analysis, the Bureau has been studying these markets for liquidity loans for over five 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.
14

The Bureau has published five reports based upon these data.
15

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 five 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, Tribal consultations, and through a Small Business Review Panel process as described further below. As described in Summary of the Rulemaking Process, the Bureau received and reviewed over one million comments on its proposal, mostly from lenders and borrowers within the respective markets.

13
The Dodd-Frank Act does not define “payday loan,” though it refers to the term in section 1024(a)(1)(E), and the Bureau is not proposing to define it 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 rule.

14
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).

15

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

This Background section provides a brief description of the major components of the markets for short-term loans and longer-term balloon-payment loans, describing the product parameters, industry size and structure, lending practices, and business models of major market segments. The Background section also provides a brief overview of the additional markets for higher-cost longer-term installment loans that are subject to the payment practices components of the final rule. This section also describes recent State and Federal regulatory activity in connection with these various product markets. Market Concerns—Underwriting below, provides a more detailed description of consumer experiences with short-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. The Background section also includes an

extensive description of the methods by which lenders initiate payments from consumers' accounts. Market Concerns—Payments, below, describes consumer experiences and concerns with these payment practices. Most of the comments received on the proposal's Background section agreed in general terms with the descriptions of the markets and products described below, although there may be slight differences in individual lenders' loan products and business practices. Comments that provided significantly different information are noted below.

B. Short-Term, Hybrid, and Balloon-Payment Loans

Providing short-term loans for liquidity needs has been a long-term challenge in the consumer financial services market due to the fixed costs associated with loan origination regardless of loan size. At 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.
16

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.”
17

16
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. John P. Caskey, “Fringe Banking and the Rise of Payday Lending,” at 17, 23 (Patrick Bolton & Howard Rosenthal eds., New York: Russell Sage Foundation, 2005).

17
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,
18

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”). One of the larger payday lenders began making payday loans in Kansas in 1992, and that same year at least one State regulator issued an administrative interpretation holding that deferred presentment activities were consumer loans subject to that State's licensing and consumer lending laws.
19

One commenter described his role in developing and expanding the deferred presentment lending industry in Tennessee in the early 1990s prior to any regulation in that State, while noting that those same activities required lending licenses in two nearby States.

18

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

19
QC Holdings, Inc., Registration Statement (Form S-1), at 1 (May 7, 2004);),
see, e.g.,
Laura Udis, Adm'r Colo. Dep't of Law, Unif. Consumer Credit Code, “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,” Administrative Interpretation No. 3.104-9201 (June 23, 1992) (on file).

Several market factors converged around the same time that spurred the development of these new forms of short-term small-dollar lending. Consumers were using credit cards more frequently for short-term liquidity lending needs, a trend that continues today.
20

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.

20
Robert D. Manning, “Credit Card Nation: The Consequences of America's Addiction to Credit” (Basic Books 2000); Amy Traub, “Debt Disparity: What Drives Credit Card Debt in America,” Demos (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.
21

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.

21

See
Pew Charitable Trusts, “A Short History of Payday Lending Law” (July 18, 2012). This article 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 2015 survey, almost 14.8 percent of U.S. households that had used a payday loan in the prior year had also used a vehicle title loan.
22

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.
23

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

22
Estimates by the Bureau's Office of Research are based on data derived from FDIC. Fed. Deposit Ins. Corp., “
2015 FDIC National Survey of Unbanked and Underbanked Households”
(Oct. 20, 2016),
available at https://www.fdic.gov/householdsurvey/2015/2015report.pdf.

23

See, e.g.,
Advance America, “Title Loan Services,”
available at https://www.advanceamerica.net/services/title-loans
(last visited Mar. 3, 2016); FirstCash, “Own Your Car? Need Cash Now? Drive Away with Cash in Minutes,”
available at http://ww2.firstcash.com/title-loans
(last visited May 15, 2017); Check Into Cash, “Auto Title Loans,”
available at https://checkintocash.com/commercial/auto-title-loans/
(last visited Sept. 14, 2017); Community Choice Financial/CheckSmart “Get Cash Fast,”
available at https://www.ccfi.com/checksmart/
(last visited Mar. 3, 2016); Speedy Cash, “Title Loans,”
available at https://www.speedycash.com/title-loans/
(last visited Sept. 14, 2017); PLS Financial Services, “Title Loans,”
available at http://pls247.com/il/loans.html
(last visited Mar. 3, 2016). Moneytree offers vehicle title and installment loans in Idaho and Nevada.
See, e.g.,
Money Tree Inc., “Title Loans (Idaho),”
available at https://www.moneytreeinc.com/loans/idaho/title-loans
(last isited Mar. 3, 2016); Money Tree Inc., “Title Loans (Nevada),”
available at https://www.moneytreeinc.com/loans/nevada/title-loans
(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).
24

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 35 States that either have created a carve-out from their general usury cap for payday loans or have no usury caps on consumer loans.
25

The remaining 15 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.

24
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.

25

See
Pew Charitable Trusts, “State Payday Loan Regulation and Usage Rates” (Jan. 14, 2014),
available at http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates
(for a list of States). Other reports reach slightly different totals of payday authorizing States depending on their categorization methodology.
See, e.g.,
Susanna Montezemolo, “The State of Lending in America & Its Impact on U.S. Households: Payday Lending Abuses and Predatory Practices,” at 32-33 (Ctr. for Responsible Lending 2013),
available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf;
Consumer Fed'n of Am., “Legal Status of Payday Loans by State,”
available at http://www.paydayloaninfo.org/state-information
(last visited Apr. 6, 2016) (lists 32 States as having authorized or allowed payday lending). Since publication of these reports, South Dakota enacted a 36 percent usury cap for consumer loans. Press Release, S.D. Dep't of Labor and Reg., “Initiated Measure 21 Approved” (Nov. 10, 2016),
available at http://dlr.sd.gov/news/releases16/nr111016_initiated_measure_21.pdf.
Legislation in New Mexico prohibiting short-term payday and vehicle title loans will go into effect on January 1, 2018. Regulatory Alert, N.M. Reg. and Licensing Dep't, “Small Loan Reforms,”
available at http://www.rld.state.nm.us/uploads/files/HB%20347%20Alert%20Final.pdf.

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.
26

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

26
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
Speedy Cash, “Can Anyone Get a Payday Loan?,”
available at https://www.speedycash.com/faqs/payday-loans/
(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); FirstCash, Inc., 2016 Annual Report (Form 10-K), at 21.

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.
27

In 2013, the Bureau reported that the median loan amount for storefront payday loans was $350, based on supervisory data.
28

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
29

and State regulatory reports.
30

27
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, Tennessee, and Virginia), 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); 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. secs. 28-46-413(1), (2); 815 Ill. Comp. Stat. 122/2-5(e); Ind. Code secs. 24-4.5-7-402, 404; Nev. Rev. Stat. sec. 604A.425(1)(b); N.M. Stat. Ann. sec. 58-15-32(A); Utah Code Ann. sec. 7-23-401; Wash. Rev. Code sec. 31.45.073(2); Wis. Stat. sec. 138.14(12)(b); Wyo. Stat. Ann. sec. 40-14-363. As noted above, the New Mexico statute will be repealed on Jan. 1, 2018.
See
N.M. H.B. 347, 53d Leg., 1st Sess. (N.M. 2017),
available at https://www.nmlegis.gov/Sessions/17%20Regular/final/HB0347.pdf
(hereinafter N.M. H.B. 347).

28

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

29
Leslie Parrish & Uriah King, “Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume,” at 21 (Ctr. for Responsible Lending 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 (Report 3, 2013),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
(reporting $375 as the average). Leslie Parrish & Uriah King, Ctr.

30

See, e.g.,
Ill. Dep't. of Fin. & Prof. Reg., “Illinois Trends Report All Consumer Loan Products Through December 2015,” at 15 (Apr. 14, 2016),
available at http://www.idfpr.com/DFI/CCD/pdfs/IL_Trends_Report%202015-%20FINAL.pdf?ActID=1204&ChapterID=20
) ($355.85 is the average for Illinois); Idaho Dep't. of Fin., “Idaho Credit Code `Fast Facts',” at 5 (Fiscal and Annual Report Data as of January 1, 2016),
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf
($350 is the average for Idaho); Wash. State Dep't. of Fin. Insts., “2015 Payday Lending Report,” at 6 (2015),
available at http://www.dfi.wa.gov/sites/default/files/reports/2015-payday-lending-report.pdf
($387.35 is the average for Washington). For example: $355.85 (Illinois average,
see
Ill.

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.
31

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.
32

The annual percentage rate (APR) on a 14-day loan with these terms is 391 percent.
33

For payday borrowers

who receive monthly income and thus receive a 30-day or monthly payday loan—many of whom are Social Security recipients
34

—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.
35

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

31
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 $100 for loans under $250 and $21.95 for larger loans (up to the State maximum of $500). Six States do not cap fees on payday loans or are silent on fees (Delaware, Idaho, Nevada, and Texas (no cap on credit access business fees) and Utah and Wisconsin (silent on fees)). Depending on State law, the fee may be referred to as a “charge,” “rate,” “interest,” or other similar term. R.I. Gen. Laws sec. 19-14.4-4(4); Fla. Stat. sec. 560.404(6); Or. Rev. Stat. sec. 725A.064(1)-()-(2); Miss. Code Ann. sec. 75-67-519(4); Del. Code Ann. tit. 5, sec. 2229; Idaho Code Ann. sec. 28-46-412(3); Tex. Fin. Code Ann. sec. 393.602(b); Utah Code Ann. sec. 7-23-401; Wis. Stat. sec. 138.14(10)(a).

32
“CFPB Payday Loans and Deposit Advance Products White Paper,” at 15-17.

33
Throughout 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 part 1026, except where otherwise specified.

34
“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).

35
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 sec. 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 18 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.
36

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 $90 for the loan.

36
This rulemaking 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, 17 of the States that authorize single-payment payday lending prohibit lenders from rolling over loans and 11 more States impose some rollover limitations.
37

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.
38

Ten 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.
39

37
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. Cal. Fin. Code sec. 23037(a); Fla. Stat. sec. 560.404(18); Haw. Rev. Stat. sec. 480F-4(d); 815 Ill. Comp. Stat. 122/2-30; Ind. Code sec. 24-4.5-7-402(7); Ky. Rev. Stat. Ann. sec. 286.9-100(14); Mich. Comp. Laws sec. 487.2155(1); Minn. Stat. sec. 47.60(2)(f); Miss. Code Ann. sec. 75-67-519(5); Neb. Rev. Stat. sec. 45-919(1)(f); N.M. Stat. Ann. sec. 58-15-34(A) (to be repealed January 1, 2018 as noted above); Okla. Stat. tit. 59, sec. 3109(A); S.C. Code Ann. sec. 34-39-180(F); Tenn. Code Ann. sec. 45-17-112(q); Va. Code Ann. sec. 6.2-1816(6); Wash. Rev. Code sec. 31.45.073(2); Wyo. Stat. Ann. sec. 40-14-364. Other States such as Iowa and Kansas restrict a loan from being repaid with the proceeds of another loan. Iowa Code sec. 533D.10(1)(e); Kan. Stat. Ann. sec. 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); Utah (allowed up to 10 weeks after the execution of the first loan); and Wisconsin (one). Ala. Code sec. 5-18A-12(b); Alaska Stat. sec. 06.50.470(b); Del. Code Ann. tit. 5, sec. 2235A(a)(2); Idaho Code Ann. sec. 28-46-413(9); Mo. Rev. Stat. sec. 408.500(6); Nev. Rev. Stat. sec. 604A.480(1); N.D. Cent. Code sec. 13-08-12(12); Or. Rev. Stat. sec. 725A.064(6); R.I. Gen. Laws sec. 19-14.4-5.1(g); Utah Code Ann. sec. 7-23-401(4)(b); Wis. Stat. sec. 138.14 (12)(a).

38

See
CFPB Payday Loans and Deposit Advance Products White Paper, at 94; Julie A. Meade, Adm'r of the Colo. Unif. Consumer Credit Code Unit, Colo. Dep't of Law, “Payday Lending Demographic and Statistical Information: July 2000 through December 2012,” at 24 (Apr. 10, 2014),
available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf
; Pew Charitable Trusts, “Payday Lending in America: Who Borrows, Where They Borrow, and Why,” at 15 (Report 1, 2012),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
; Leslie Parrish & Uriah King, “Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume,” at 7 (Ctr. for Responsible Lending 2009),
available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf
.

39
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) (to be repealed Jan. 1, 2018 as noted above); 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 sec. 5-18A-12(b); Fla. Stat. sec. 560.404(19); 815 Ill. Comp. Stat. 122/2-5(b); Ind. Code sec. 24-4.5-7-401(2); N.M. Stat. Ann. sec. 58-15-36; N.D. Cent. Code sec. 13-08-12(4); Ohio Rev. Code Ann. sec. 1321.41(E), (N), (R); Okla. Stat. tit. 59, sec. 3110; Or. Rev. Stat. sec. 725A.064(7); S.C. Code Ann. sec. 34-39-270(A), (B); Va. Code Ann. sec. 6.2-1816(6); Wis. Stat. sec. 138.14(12)(a).

At least 17 States have adopted laws that require payday lenders to offer borrowers the option of taking an extended repayment plan when they encounter difficulty in repaying payday loans.
40

Details about the extended repayment plans vary including: Borrower eligibility (in some States only prior to the lender instituting collections or litigation); 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.

Two States more generally allow lenders the discretion to offer borrowers an extension of time to repay or enter into workout agreements with borrowers having repayment difficulties.
41

The effects of these various restrictions are discussed further below in Market Concerns—Underwriting.

40
States with statutory extended repayment plans include: Alabama, Alaska, Florida, Idaho, Illinois, Indiana, Louisiana, Michigan (fee permitted), Nevada, New Mexico (to be repealed Jan. 1, 2018 as noted above), 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 sec. 5-18A-12(c); Alaska Stat. sec. 06.50.550(a); Fla. Stat. sec. 560.404(22)(a); Idaho Code Ann. sec. 28-46-414; 815 Ill. Comp. Stat. 122/2-40; Ind. Code sec. 24-4.5-7-401(3); La. Rev. Stat. Ann. sec. 9:3578.4.1; Mich. Comp. Laws sec. 487.2155(2); Nev. Rev. Stat. sec. 604A.475(1); N.M. Stat. Ann. sec. 58-15-35; Okla. Stat. tit. 59, sec. 3109(D); S.C. Code Ann. sec. 34-39-280; Utah Code Ann. sec. 7-23-403; Va. Code Ann. sec. 6.2-1816(26); Wash. Rev. Code sec. 31.45.084(1); Wis. Stat. sec. 138.14(11)(g); Wyo. Stat. Ann. sec. 40-14-366(a).

41
California (no fees permitted) and Delaware are States that permit payday lenders to extend the time for repayment of payday loans. Cal. Fin. Code sec. 23036(b); Del. Code Ann. tit. 5, sec. 2235A(a)(2).

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 2.5 million households (2 percent of U.S. households) used payday loans in 2015.
42

In another survey, 3.4 percent of households reported taking out a payday loan in the past year.
43

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 annually and included both storefront and online loans.
44

See Market Concerns—Underwriting for additional information on borrower characteristics.

42
Fed. Deposit Ins. Corp., “2015 FDIC National Survey of Unbanked and Underbanked Households,” at 2, 34 (Oct. 20, 2016),
available at https://www.fdic.gov/householdsurvey/2015/2015report.pdf
.

43
Jesse Bricker, et al., “Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances,” at 27 (Bd. of Governors of the Fed. Reserve Sys., 103 Fed. Reserve Bulletin No. 3, 2017),
available at https://www.federalreserve.gov/publications/files/scf17.pdf
.

44
Pew Charitable Trusts, “Payday Lending in America: Who Borrows, Where They Borrow, and Why,” at 4 (Report 3, 2013),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf
.

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 re-borrowing as a new loan that is added to the total. By this metric, one industry analyst estimated that from 2009 to 2014, storefront payday lending generated approximately $30 billion in new loans per year and that by 2015 the volume had declined to $23.6 billion,
45

although these numbers may include products other than single-payment loans. The analyst's estimate for combined storefront and online payday loan volume was $45.3 billion in 2014 and $39.5 billion in 2015, down from a peak of about $50 billion in 2007.
46

45
John Hecht, “The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation” (2016) (Jefferies LLC, slide presentation) (on file); John Hecht, “The State of Short-Term Credit in a Constantly Changing Environment” at 4 (2015) (Jeffries LLC, slide presentation) (on file).

46
Hecht, “Short-Term Credit Amid Ambiguity.”

Alternatively, the industry can be measured by calculating the dollar amount of loan balances outstanding. Given the amount of payday loan re-borrowing, which results in the same funds of the lender being used to finance multiple loan originations to the same borrower, 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.
47

In 2015, industry revenue (fees paid on storefront payday loans) was an estimated $3.6 billion, representing 15 percent of loan originations. Combined storefront and online payday revenue was estimated at $8.7 billion in 2014 and $6.7 billion in 2015, down from a peak of over $9 billion in 2012.
48

47
The Bureau's staff estimate is 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 2016, 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 below.

48
Hecht, “Short-Term Credit Amid Ambiguity.”

In the last several years, it has become increasingly difficult to identify the largest payday lenders due to firm mergers, diversification by many lenders into a range of products including installment loans and retraction by others into pawn loans, and the lack of available data because most firms are privately held. However, there are at least 10 lenders with approximately 200 or more storefront locations.
49

Only a few of these firms are publicly traded companies.
50

Most large payday lenders are privately held,
51

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).
52

Several industry commenters, an industry trade association commenter, and a number of payday

lenders noted that they offer non-credit products and services at their locations including check cashing, money transmission and bill payments, sale of prepaid cards, and other services, some of which require them to comply with other laws as “money service businesses.”

49
These firms include: ACE Cash Express, Advance America, Amscot Financial, Axcess Financial (CNG Financial, Check `n Go, Allied Cash), Check Into Cash, Community Choice Financial (Checksmart), CURO Financial Technologies (Speedy Cash/Rapid Cash), DFC Global Corp (Money Mart), FirstCash, and QC Holdings.
See
Ace Cash Express, “Store Locator,”
available at https://www.acecashexpress.com/locations
; Advance America, “Find an Advance America Store Location,”
available at https://www.advanceamerica.net/locations/find
; Amscot Financial, Inc., “Amscot Locations,”
available at https://www.amscot.com/locations.aspx
; Check `n Go, “State Center,”
available at https://www.checkngo.com/resources/state-center
; Allied Cash Advance, “Allied Cash Advance Store Directory,”
available at https://locations.alliedcash.com/index.html
; Check Into Cash, “Payday Loan Information By State,”
available at https://checkintocash.com/payday-loan-information-by-state
; Community Choice Financial (CheckSmart), “Locations,”
available at https://www.ccfi.com/locations
/; SpeedyCash, “Speedy Cash Stores Near Me,”
available at https://www.speedycash.com/find-a-store
; DFC Global Corp., “Home,”
available at http://www.dfcglobalcorp.com/index.html
; FirstCash Inc., “Find a Location Near You,”
available at http://www.firstcash.com/
; QC Holdings, Inc., “Branch Locator,”
available at https://www.qcholdings.com/branchlocator.aspx
(all sites last visited Jul. 26, 2017).

50
The publicly traded firms are Community Choice Financial Inc./Cash Central/Checksmart (CCFI), EZCORP, Inc. (EZPW), FirstCash Inc. (FCFS), and QC Holdings (QCCO). As noted above, in September 2016, FirstCash Financial Services merged with Cash America, resulting in the company FirstCash Inc. Prior to the merger, in November 2014, Cash America migrated its online loans to a spin-off company, Enova. Cash America International, Inc., 2015 Annual Report (Form 10-K), at 3 (Dec. 14, 2016). Both FCFS and Cash America had been deemphasizing payday lending in the U.S., and shifting towards pawn. In 2016, the new company, FirstCash, had only 45 stand-alone consumer loan locations, in Texas, Ohio, and California, and 326 pawn locations that also offered consumer loans, compared to 1,085 pawn locations. Only 4 percent of its revenue was from non-pawn consumer loans and credit services operations. (Credit services organizations are described below.) FirstCash Inc., 2016 Annual Report (Form 10-K), at 5, 7. In 2015, EZCORP exited payday, installment, and auto title lending, focusing domestically on pawn lending. EZCORP, Inc., 2016 Annual Report (Form 10-K), at 3 (Dec. 14, 2016). QC Holdings delisted from Nasdaq in February 2016 and is traded over-the-counter. QC Holdings, Inc., Suspension of Duty to File Reports Under Sections 13 and 15(d) (Form 15).

51
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
Susanna Montezemolo, “Payday Lending Abuses and Predatory Practices: The State of Lending in America & Its Impact on U.S. Households” at 9-10 (Ctr. for Responsible Lending, 2013); John Hecht, “Alternative Financial Services: Innovating to Meet Customer Needs in an Evolving Regulatory Framework” (2014) (Stephens, Inc., slide presentation) (on file).

52
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.

According to one industry analyst, there were an estimated 16,480 payday loan stores in 2015 in the United States, a decline from 19,000 stores in 2011 and down from the industry's 2007 peak of 24,043 storefronts.
53

53
Hecht,
“Short-Term Credit Amid Ambiguity,”
at 7. Although there is no estimate for 2016, the number of storefronts offering payday loans is likely smaller due to the regulatory changes in South Dakota, the exit of EZCORP from payday lending, and the merger of First Cash Financial and Cash America, and its shift away from payday lending. However, it is difficult to precisely measure the number of stores that have shifted from payday to pawn lending, rather than closing. By way of comparison, in 2015 there were 14,259 McDonald's fast food outlets in the United States. McDonald's Corp., 2015 Annual Report (Form 10-K), at 23 (Feb. 25, 2016).

The average number of payday loan stores in a county with a payday loan store is 6.32.
54

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.
55

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).
56

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.

54
James R. Barth, et al., “Do State Regulations Affect Payday Lender Concentration?,” at 12 (2015),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581622
.

55
CFPB Report on Supplemental Findings, at 90.

56
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
U.S. Census Bureau, “Metropolitan and Micropolitan,”
available at 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.
57

An analysis of loan data from 29 States found that the average store made 3,541 advances in a year.
58

Given rollover and re-borrowing rates, a report estimated that the average store served fewer than 500 customers per year.
59

57
Mark Flannery & Katherine Samolyk, “Payday Lending: Do the Costs Justify the Price?,” (FDIC Ctr. for Fin. Res., Working Paper No. 2005-09, 2005),
available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf.

58
Susanna Montezemolo, “Payday Lending Abuses and Predatory Practices: The State of Lending in America & Its Impact on U.S. Households” at 26 n.2 (Ctr. for Responsible Lending, 2013),
available at http://www.responsiblelending.org/state-of-lending/reports/10-Payday-Loans.pdf
.

59
Pew Charitable Trusts, “Payday Lending in America: Policy Solutions,” at 18 (Report 3, 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.”
60

Some lenders offer new borrowers their initial loans at no fee (“first loan free”) to encourage consumers to try a payday loan.
61

Stores are typically located in high-traffic commuting corridors and near shopping areas where consumers obtain groceries and other staples.
62

60
Cash America Int'l Inc., “Cash Advance/Short-term Loans,”
available at http://www.cashamerica.com/LoanOptions/CashAdvances.aspx
(last visited Apr. 7, 2016).

61

See, e.g.,
Instant Cash Advance Corp., “Instant PayDay,”
available at http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php
(introductory offer of a free (no fee) cash advance of $200) (storefront payday loans); Check N Title Loans, “First Loan Free,”
available at http://www.checkntitle.com/
(storefront payday and title loans); AmeriTrust Financial LLC, “1st Advance Free,” available at
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).

62

See
FirstCash, Inc., 2016 Annual Report (Form 10-K), at 9; QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 11; Community Choice Fin. Inc., 2016 Annual Report (Form 10-K), at 6.

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.
63

Academic studies have found that, in States with rate caps, loans are almost always made at the maximum rate permitted.
64

Another study likewise found that in States with rate caps, firms lent at the maximum permitted rate, and 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 found, however, 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
65

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).
66

One industry commenter cited the difference in average loan pricing between storefront (generally lower) and online loans (generally higher), as evidence of price competition but that is more likely due to the fact that state-licensed lenders are generally constrained in the amount they can charge rather than competitive strategies adopted by those lenders. That commenter also notes as evidence of price competition that it sometimes discounts its own loans from its advertised prices; the comment did not address whether such discounts were offered to meet competition.

63

See
QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 12-13.

64
Robert DeYoung & Ronnie Phillips, “Payday Loan Pricing,” at 27-28, (Fed. Reserve Bank of Kan. City, Working Paper No. RWP 09-07, 2009),
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, “Payday Lending: Do the Costs Justify the Price?,” at 9-10 (FDIC Ctr. for Fin. Res., Working Paper No. 2005-09, 2005),
available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf
.

65
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,” (Apr. 2014),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf
.

66
Pew Charitable Trusts, “How State Rate Limits Affect Payday Loan Prices,” (Apr. 2014),
available at http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/stateratelimitsfactsheetpdf.pdf
.

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.
67

Although a few States impose limited requirements that lenders consider a borrower's ability to repay,
68

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.
69

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 during the loan application process 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.
70

Through market outreach and confidential information gathered in the course of statutory functions, the Bureau is aware that many storefront payday lenders only conduct their limited underwriting for first-time borrowers or those returning after an absence.

67

See, e.g.,
Check Into Cash, “Frequently Asked Questions and Policies of Check into Cash,”
available at https://checkintocash.com/faqs/in-store-cash-advance/
(last visited Sept. 14, 2017) (process as described by one lender).

68
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 sec. 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 sec. 408.500(7). Effective July 1, 2017, Nevada lenders must assess borrowers' reasonable ability to repay by considering, to the extent available, their current or expected income; current employment status based on a pay stub, bank deposit, or other evidence; credit history; original loan amount due, or for installment loans or potential repayment plans, the monthly payment amount; and other evidence relevant to ability to repay including bank statements and borrowers' written representations. 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 as described above.

69

See, e.g.,
Neil Bhutta,
et al.,
“Payday Loan Choices and Consequences,” 47 J. of Money, Credit and Banking 223 (2015).

70

See, e.g.,
Advance America, “FAQs on Payday Loans/Cash Advances: Is my credit score checked before receiving an in-store Payday Loan?,”
available at https://www.advanceamerica.net/questions/payday-loans-cash-advances
(last visited May 10, 2017) (the custom scoring model described by one lender).

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.
71

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.

71
The States with databases are Alabama, Delaware, Florida, Illinois Indiana, Kentucky, Michigan, New Mexico (to be repealed Jan. 1, 2018 as noted above), 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 sec. 5-18A-13(o); Del. Code Ann. tit. 5, sec. 2235B; Fla. Stat. sec. 560.404(23); 815 Ill. Comp. Stat. 122/2-15; Ind. Code sec. 24-4.5-7-404(4); Ky. Rev. Stat. Ann. sec. 286.9-100(19)(b); Mich. Comp. Laws sec. 487.2142; N.M. Stat. Ann. sec. 58-15-37(B); N.D. Cent. Code sec. 13-08-12(4); Okla. Stat. tit. 59, sec. 3109(B)(2)(b); S.C. Code Ann. sec. 34-39-175; Va. Code Ann. sec. 6.2-1810; Wash. Rev. Code sec. 31.45.093; Wis. Stat. sec. 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,
72

consumers in practice generally return to the store when the loan is due to “redeem” the check either by repaying the loan or by paying the finance charges and rolling over the loan.
73

For example, a major payday lender with a predominantly storefront loan portfolio reported that in 2014, over 90 percent of its payday loan volume was repaid in cash at its branches by consumers either paying in full or by paying the “original loan fee” (finance charges) and rolling over the loan (signing a new promissory note and leaving a new check or payment authorization).
74

72
Payments may also be taken from the consumer's debit card.
See, e.g.,
All American Check Cashing, Inc., Miss. Dep't of Banking and Consumer Fin., Administrative Order, Cause No. 2016-001, May 11, 2017,
available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf
.

73
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.

74
QC Holdings, 2014 Annual Report (Form 10-K), at 7.

An industry commenter stated that repayment in cash reflects customers' preferences. However, borrowers are strongly encouraged and in some cases required by lenders to return to the store when payment is due. 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 . . . .”
75

75
Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar. 15, 2012).
See also
Check Into Cash, “Cash Advance Loan FAQs, What is a cash advance?,”
available at 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.
76

Another storefront payday lender 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.”
77

76
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.

77
Instant Cash Advance, “How Cash Advances Work,”
available at http://www.instantcashadvancecorp.com/services/payday-loans/
(last visited July 17, 2017).

The Bureau is also 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. 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 re-borrow 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, although one industry commenter described the industry's incentives to employees as rewards for increases in net revenue. Since as discussed below, a majority of loans result from rollovers of existing loans or re-borrowing contemporaneously with or shortly after loans have been repaid, rollovers and re-borrowing contribute substantially to employees'

compensation. From confidential information gathered in the course of statutory functions, the Bureau is aware that rollover and re-borrowing 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 when borrowers notified lenders that they had lost their jobs or suffered pay reductions.

Store personnel often encourage borrowers to roll over their loans or to re-borrow, 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 re-borrowing 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 an 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.
78

In Mississippi, another lender employed a companywide practice in which store personnel encouraged borrowers with monthly income or benefits payments to use the proceeds of one loan to pay off another loan, although State law prohibited these renewals or rollovers.
79

78
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),
available at http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/
.

79
All American Check Cashing, Inc., Miss. Dep't of Banking and Consumer Fin., Administrative Order, Cause No. 2016-001, May 11, 2017,
available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf
. The lender also failed to refund consumer overpayments. The State regulator ordered revocation of all of the lender's 75 licenses, consumer refunds, civil penalties of over $1 million, and other relief. All American appealed the order and the matter was settled with terms reducing the penalty to $889,350. Agreed Order of Dismissal with Prejudice, All American Check Cashing Inc. v. Miss. Dep't of Banking and Consumer Fin., No. G-2017-699 S/2 (Miss. 2017),
available at http://www.dbcf.ms.gov/documents/aacc_agreed_060917.pdf
.

In addition, though some States require lenders to offer borrowers the option of 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 the State-mandated extended payment plan option and that some lenders had banned borrowers who had exercised their rights to elect payment plans from taking new loans.
80

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 representing 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.
81

Another trade association with 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 publicly available on its Web site.
82

80
See State of Colo. Dep't of Law, Off. of Att'y Gen., “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 also Market Concerns—Covered Loans below for additional discussion of lenders' extended payment plan practices.

81
Community Fin. Servs. Ass'n of America, “About CFSA,”
available at http://cfsaa.com/about-cfsa.aspx
(last visited Jan. 15, 2016); Community Fin. Servs. Ass'n of America, “CFSA Member Best Practices,”
available at http://cfsaa.com/cfsa-member-best-practices.aspx
(last visited Sept. 15, 2017); Community Fin. Servs. Ass'n of America, “What Is an Extended Payment Plan?,”
available at http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.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.

82
Fin. Serv. Ctrs. of America, “Membership,”
http://www.fisca.org/AM/Template.cfm?Section=Membership
(last visited Sept. 15, 2017); 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); Fin. Serv. Ctrs. of America, “FiSCA Best Practices,”
http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm
(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 eventually depositing the post-dated check that the consumer had provided at origination or electronically debiting the account. The Bureau is also aware of some situations in which lenders have obtained electronic payments from borrowers' bank accounts and also accepted cash payments from borrowers at storefronts.
83

The Bureau is aware, from confidential information gathered in the course of its statutory functions and from market outreach, that lenders may use various methods 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 to the use of software offered by a number of vendors that attempts to model likelihood of repayment (“predictive ACH”).
84

If

these attempts are unsuccessful, store personnel at either the storefront level or at a centralized location will then generally engage in collection activity.

83

See
Bureau of Consumer Fin. Prot., “Supervisory Highlights,” at 31-32 (Summer 2017),
available at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
See also, Press Release, Bureau of Consumer Fin. Prot., “CFPB Takes Action Against Check Cashing and Payday Lending Company for Tricking and Trapping Consumers,” (May 11, 2016), available at
https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-check-cashing-and-payday-lending-company-tricking-and-trapping-consumers/
; All American Check Cashing, Inc., Miss. Dept. of Banking and Consumer Fin., Administrative Order, No. 2016-001 (May 11, 2017),
available at http://www.dbcf.ms.gov/documents/actions/consumerfin/aa0517.pdf
(for a description of one lender's alleged failure to refund overpayments resulting from these procedures and an associated State agency's order against that lender.).

84

See, e.g.,
Press Release, Clarity Servs., “ACH Presentment Will Help Lenders Reduce Failed ACH Pulls,” (Aug. 1, 2013),
available at https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/
; Factor Trust, “Markets,”
http://ws.factortrust.com/products/
(last visited Apr. 8, 2016); Microbilt, “Bank Account Verify. More Predictive. Better Performance. Lower Costs.,”

http://

www.microbilt.com/bank-account-verification.aspx

(last visited Apr. 8, 2016); DataX. Ltd., “Know Your Customer,”
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.
85

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.
86

Or, the lender may attempt to present the payment multiple times, a practice that the Bureau has noted in supervisory examinations.
87

A more detailed discussion of payments practices is provided in part D and Markets Concerns—Payments.

85
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.” FirstCash Fin. Servs., 2014 Annual Report (Form 10-K), at 5 (Feb. 12, 2015). As noted above, FirstCash has now largely exited payday lending.

86
Press Release, Bureau of Consumer Fin. Prot., “CFPB Orders EZCORP to Pay $10 Million for Illegal Debt Collection Tactics,” (Dec. 16, 2015),
available at http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/
.

87
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 debt collections activities, by both storefront employees and employees at centralized collections divisions, including calls, letters, and visits to consumers and their workplaces,
88

as well as the sale of debt to third-party collectors.
89

The Bureau recently conducted a survey of consumer debt collection experiences; 11 percent of consumers contacted about a debt in collection reported the collection activity was related to payday loan debt.
90

Further, the Bureau observed in its consumer complaint data that from November 2013 through December 2016, more than 31,000 debt collection complaints had “payday loan” as the underlying debt. In more than 11 percent of the complaints the Bureau handled about debt collection, consumers selected “payday loans” as the underlying debt.
91

88
Bureau of Consumer Fin. Prot., “CFPB Compliance Bulletin 2015-07, In-Person Collection of Consumer Debt,” (Dec. 16, 2015),
available at http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf
.

89
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). 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.
See
ACE Cash Express, Inc., Consent Order, CFPB No. 2014-CFPB-0008 (July 10, 2014),
available at http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf
; EZCorp Inc., Consent Order, CFPB No. 2015-CFPB-0031 (Dec. 16, 2015),
available at http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf.
See also, Bureau of Consumer Fin. Prot., Market Snapshot: Online Debt Sales,” at 5, 7 (Jan. 2017),
available at https://www.consumerfinance.gov/data-research/research-reports/market-snapshot-online-debt-sales/
(describing a significant share of payday loan portfolios on Web sites with online debts for sale).

90
Bureau of Consumer Fin. Prot., “Consumer Experiences with Debt Collection: Findings from the CFPB's Survey of Consumer Views on Debt,” at 19 (Jan. 2017),
available at https://www.consumerfinance.gov/documents/2251/201701_cfpb_Debt-Collection-Survey-Report.pdf
.

91
Bureau of Consumer Fin. Prot., “Monthly Complaint Report, Vol. 18,” at 12 (Dec. 2016), available at
https://www.consumerfinance.gov/data-research/research-reports/monthly-complaint-report-vol-18/
.

In addition, in 2016, the Bureau handled approximately 4,400 complaints in which consumers reported “payday loan” as the complaint product and about 26,600 complaints about credit cards.
92

As noted above, there are about 12 million payday loan borrowers annually, and approximately 156 million consumers have one or more credit cards.
93

Therefore, by way of comparison, for every 10,000 payday loan borrowers, the Bureau handled about 3.7 complaints, while for every 10,000 credit card holders, the Bureau handled about 1.7 complaints.

92
Bureau of Consumer Fin. Prot., “Consumer Response Annual Report, January 1-December 31, 2016,” at 27, 33-35 (Mar. 2017),
available at https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF
.

93
The Bureau's staff estimate is based on finding that 63 percent of American adults hold an open credit card and Census population estimates. Bureau of Consumer Fin. Prot., “The Consumer Credit Card Market Report,” at 36 (Dec. 2015),
available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf
; U.S. Census Bureau, “Annual Estimates of Resident Population for Selected Age Groups by Sex for the United States, States, Counties, and Puerto Rico Commonwealth and Municipios: April 1, 2010 to July 1, 2016,” (June 2017),
available at https://factfinder.census.gov/bkmk/table/1.0/en/PEP/2016/PEPAGESEX
. Other estimates of the number of credit card holders have been higher, meaning that 1.7 complaints per 10,000 credit card holders would be a high estimate. The U.S. Census Bureau estimated there were 160 million credit card holders in 2012, and researchers at the Federal Reserve Bank of Boston estimated that 72.1 percent of U.S. consumers held at least one credit card in 2014. U.S. Census Bureau, “Statistical Abstract of the United States: 2012,” at 740 tbl.1188 (Aug. 2011),
available at https://www.census.gov/library/publications/2011/compendia/statab/131ed.html
; Claire Greene et al., “The 2014 Survey of Consumer Payment Choice: Summary Results,” at 18 (Fed. Reserve Bank of Boston, No. 16-3, 2016),
available at https://www.bostonfed.org/-/media/Documents/researchdatareport/pdf/rdr1603.pdf.
As noted above in the text, additional complaints related to both credit cards and payday loans are submitted as debt collection complaints with credit card or payday loan listed as the type of debt.

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.
94

A recent news report found that the majority of non-traffic civil cases filed in 14 Utah justice courts are payday loan collection lawsuits, and in one justice court, the percentage was as high as 98.8 percent.
95

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.
96

However, an industry trade association commenter states that many payday lenders do not file lawsuits on defaulted debt.

94
Coalition of Religious Communities, “Payday Lenders and Small Claims Court Cases in Utah,” at 2 (2005-2010),
available at http://www.consumerfed.org/pdfs/PDL-UTAH-court-doc.pdf.

95
Lee Davidson, “Payday Lenders Sued 7,927 Utahns Last Year,” The Salt Lake City Tribune, Aug. 2, 2016,
http://www.sltrib.com/home/3325528-155/payday-lenders-sued-7927-utahns-last
.

96
Press Release, Bureau of Consumer Fin. Prot., “Consumer Financial Protection Bureau Takes Action Against Payday Lender for Robo-Signing,” (Nov. 20, 2013),
available at 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 time frame, 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.
97

One academic study found loss rates to be even higher.
98

97
The Bureau's staff estimate is 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.

98
Mark Flannery & Katherine Samolyk, “Payday Lending: Do the Costs Justify the Price?,” at 16 (FDIC Ctr. for Fin. Res., Working Paper No. 2005-09, 2005),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=771624
(estimating annual charge-offs on storefront payday loans at 66.6 percent of outstanding loans).

To sustain these significant costs, the payday lending business model is dependent upon a large volume of re-borrowing—that is, rollovers, back-to-back loans, and re-borrowing 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 10 or more times.
99

Similarly, when the Bureau identified a cohort of borrowers and tracked them over 10 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 10 or more loans.
100

The Bureau defines a sequence as an initial loan plus one or more subsequent loans renewed within 30 days 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.
101

A more detailed discussion of sequence length is provided in the section-by-section discussion of §§ 1041.2(a)(14) and 1041.5 and in Market Concerns—Underwriting.

99
CFPB Payday Loans and Deposit Advance Products White Paper, at 22.

100
CFPB Report on Supplemental Findings, at 129.

101
The Bureau's Report on Supplemental Findings analyzed payday loan usage patterns with varying definitions of loan sequence length, including 30-days. CFPB Report on Supplemental Findings, at 109-114. Other reports have proposed other definitions of sequence length including 30 days.
See
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
; (sequences based on the borrower's pay period); nonPrime 101, “Report 7B: Searching for Harm in Storefront Payday Lending, A Critical Analysis of the CFPB's `Debt Trap' Data,” 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 Market Concerns—Underwriting 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. 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.
102

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.
103

In Alabama's first year of tracking payday loans with a single database, it reported that almost 50 percent of borrowers had seven or more payday loans and almost 37 percent of borrowers had 10 or more payday loans.
104

Other reports have found that over 80 percent of total payday loans and loan volume is due to repeat borrowing within 30 days of a prior loan.
105

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.”
106

A recent report by a specialty consumer reporting agency confirms that the industry's business model relies on repeat customers, noting that over half of all loans are made to returning customers and stating “[t]his finding suggests that even though new customers are critical, existing customers are the most productive.”
107

Market Concerns—Underwriting below discusses the impact of these outcomes for consumers who are unable to repay and either default or re-borrow.

102
Susanna Montezemolo, “The State of Lending in America & Its Impact on U.S. Households: Payday Lending Abuses and Predatory Practices,” at 12 (Ctr. for Responsible Lending 2013),
available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf
. For additional information on Florida loan use,
see
Veritec Solutions, “State of Florida Case Study: Deferred Presentment Program,” (Implemented 2002),
available at http://www.veritecs.com/case-studies/floridas-deferred-presentation-database-and-program-solution/
.

103
Brandon Coleman & Delvin Davis, “Perfect Storm: Payday Lenders Harm Florida Consumer Despite State Law,” at 4 (Ctr. for Responsible Lending, 2016),
available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf
.

104
Veritec Solutions, “State of Alabama Deferred Presentment Services Program, Report on Alabama Deferred Presentment Loan Activity, October 1, 2015 through September 30, 2016,”
available at http://www.banking.alabama.gov/pdf/press%20release/InterimRptStatewideDatabase10_1_15to9_30_16.pdf.

105
Leslie Parrish & Uriah King, “Phantom Demand: Short-term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume,” at 11-12 (Ctr. for Responsible Lending, 2009),
available at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf
.

106
Letter from Hilary B. Miller, on behalf of Community Fin. Servs. Ass'n. of America to Bureau of Consumer Fin. Prot. (June 20, 2013),
available at http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf
(Petition of Community Financial Services Association of America For Retraction of Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings, at 5.).

107
Clarity Services, Inc., “2017 Subprime Lending Trends: Insights into Consumers & the Industry,” at 8 (2017),
available at https://www.clarityservices.com/wp-content/uploads/2017/03/Subprime-Lending-Report-2017-Clarity-Services-3.28.17.pdf
. This finding does not distinguish between storefront and online lenders, nor is it expressly limited to single payment loans.

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.
108

108
12 CFR part 1026, supplement I, comment 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.
109

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 (MAPR)
110

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.
111

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.”
112

109
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.

110
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.

111
72 FR 50580 (Aug. 31, 2007).

112
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.
113

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.
114

113
80 FR 43560 (July 22, 2015).

114
80 FR 43560 (July 22, 2015).

At the State level, the last States to enact legislation authorizing payday lending—Alaska and Michigan—did so in 2005.
115

At least 11 States and jurisdictions 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.

115
Alaska Stat. secs. 06.50.010-900; Mich. Comp. Laws secs. 487.2121-.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.
116

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.
117

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
118

and the Mortgage Loan Act;
119

the latter practice was upheld by the State Supreme Court in 2014.
120

Also in 2008, the District of Columbia banned payday lending which had been a permissible activity under the District's check cashing law, making the loans subject to the District's 24 percent per annum maximum interest rate cap.
121

116
Ohio Rev. Code secs. 1321.35 and 1321.40.

117

See generally Ohio Neighborhood Fin., Inc.
v.
Scott,
139 Ohio St.3d 536, 13 N.E. 3d 1115 (2014).

118
Ohio Rev. Code sec. 4712.01.

119
Ohio Rev. Code sec. 1321.52(C).

120

Scott,
139 Ohio St.3d 536, 13 N.E. 3d 1115 (2014).

121
Payday Loan Consumer Protection Amendment Act of 2007, DC Act 17-42 (2007); D.C. Official Code sec. 28-3301(a) (2011).

In 2010, Colorado's legislatu

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2017-21808. Public record. Not legal advice.