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Dep’t of Law payday loan in, 2009 Deferred Deposit/Payday Lenders Annual Report online direct payday loan lenders, at 2 account checking loan payday without, available at http://www. See Market Concerns—Short-Term Loans below for additional discussion of lenders’ extended payment plan practices. 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. It also states that borrowers must request an extended payment plan at least one day prior to the date on which the loan is due and must return to the store where the loan was made to 76 do so or request the plan by using the same method used to originate the loan. Another trade association claiming over 1,300 members, including both payday lenders and firms that offer non-credit products such as check cashing and money transmission, states that members will provide the option of extended payment plans in the absence of State-mandated plans to 77 customers unable to repay but details of the plans are not available on its website. 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. If these attempts are unsuccessful, store personnel at either the storefront level or at a centralized location will then generally engage in collection activity. Collection activity may involve further in-house attempts to collect from the borrower’s 79 bank account. 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 78 For example, Press Release, Clarity Servs. Or, the lender may attempt to present the payment multiple 81 times, a practice that the Bureau has noted in supervisory examinations. The Bureau is aware of in- house collections activities, either by storefront employees or by employees at a centralized 82 collections division, including calls, letters, and visits to consumers and their workplaces, as 83 well as the selling of debt to third-party collectors. The Bureau observed in its consumer complaint data that from November 2013 through December 2015 approximately 24,000 debt collection complaints had payday loan as the underlying debt. More than 10 percent of the 84 complaints the Bureau has received about debt collection stem from payday loans. A study of small claims court cases filed in Utah from 2005 to 2010 found that 38 percent of cases were 85 attributable to payday loans. A recent news report found that the majority of non-traffic civil 80 Press Release, Bureau of Consumer Fin. 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. 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 87 court documents in about 14,000 debt collection lawsuits. 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. 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. Consumer Financial Protection Bureau Takes Action Against Payday Lender for Robo-Signing (Nov. To sustain these significant costs, the payday lending business model is dependent upon a large volume of reborrowing—that is, rollovers, back-to-back loans, and reborrowing within a short period of paying off a previous loan—by those borrowers who do not default on their first loan. The Bureau’s research found that over the course of a year, 90 percent of all loan fees comes from consumers who borrowed seven or more times and 75 percent comes from 90 consumers who borrowed ten or more times. Similarly, when the Bureau identified a cohort of borrowers and tracked them over ten months, the Bureau found that more than two-thirds of all loans were in sequences of at least seven loans, and that over half of all loans were in sequences 91 of ten or more loans. The Bureau defines a sequence as an initial loan plus one or more subsequent loans renewed within a period of time after repayment of the prior loan; a sequence thus captures not only rollovers and back-to-back loans but also re-borrowing that occurs within a short period of time after repayment of a prior loan either at the point at which a State- mandated cooling-off period ends or at the point at which the consumer, having repaid the prior 92 loan, runs out of money. 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. The Bureau’s Data Point defined a sequence to encompass all loans made within 14 days of a prior loan. Other reports have proposed other definitions of sequence length including 30 days (Marc Anthony Fusaro & Patricia J. 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 93 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, 94 as well as voluntary extended repayment plans. 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 95 same year made to borrowers with 12 or more loans. Other reports have found that over 80 percent of total payday loans and loan volume is due to repeat borrowing within thirty days of a 96 prior loan.

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Only are not the focus of the payday loan 14 percent of borrowers can afford enough 13 business model what is a payday loan lender. Borrowers explained in focus the average borrower can barely afford just groups that this incompatibility between the $55 fee required to renew an average the loans’ required payment and their storefront loan for another two weeks loan for payday 2. This fnding about fnancial situation as very or fairly good free loan payday, unaffordability helps explain why the only 15 percent can afford to pay more average borrower ends up indebted for 17 than $400 toward their payday loan debt fve months of the year. That’s anything from like “Well, Friday came, you gave them your rent, other bills, food, cost of living stuff. Now you almost have to at least get some of it back so you have enough to make it to the end of the month. A signifcantly higher number of storefront Terms Are Clear but borrowers than online borrowers thought Still Struggle to Repay the terms were clear. Although most borrowers cannot afford to repay their payday loans, large numbers The average storefront payday loan state that the terms and conditions were requires a $430 repayment in two weeks. Focus group participants often Pew’s survey found that even among those described the terms as unfair, usually who said the loan terms were very clear, meaning very expensive, but most said just 46 percent of borrowers could afford they understood what the fee was and a repayment of more than $100 a month, when the loan was due, and in that way and just 14 percent said they could pay more than $400 a month. If you’re taking out “You know the interest rate is 17 $300 and they’re charging you $90, you percent. If you do not pay it back in you get it what you’re going to have to two weeks, you’re paying $90 out of pay back. These sentiments deposit advance loans, but given that are consistent with relatively high rates of the loans are secured by the borrower’s repayment and with prior research that direct deposit to an account owned by found little evidence of strategic default. Borrowers may renew or re-borrow a loan, or experience temporary defaults by bouncing checks and incurring nonsufficient funds fees while still paying back a loan eventually. Advance America has made a similar point, stating, “97 percent of our customers pay us back. But why do people choose fxed fee, without creating another ongoing to borrow unaffordable loans in the frst obligation. The answer is not the same for not match reality: Borrowers typically 18 every borrower, but our research reveals experience prolonged periods of debt, several contributing factors. More than one-third of borrowers say they have been Lenders beneft from this misperception, in such a diffcult situation that they would because they rely on borrowers to use take a payday loan on any terms offered. Another reason is that many borrowers Prior research shows that the payday loan struggle with the temptation of having business model requires repeat usage in 20 cash readily available to them, describing order to be proftable, with nearly all payday loans as “too easy” to obtain. They cited the “short-term” short-term solution that should not be 22 aspect of payday loans as a reason for used on a long-term basis, even though their appeal and described how a payday the loans’ unaffordability makes this www. These efforts Some Borrowers Have help shape the expectations of borrowers, Been in Situations Where who say they rely on lenders to give them They Would Accept Any accurate information by a nearly 4-to-1 margin. When asked to refect on their Terms Offered experiences, borrowers expressed surprise over how long it actually took to pay off Thirty-seven percent of payday borrowers the loans, as well as frustration about how have at some point felt that they would diffcult that was to predict. This fgure rises to 46 percent among those Taken together, these and other fndings who rate their fnancial situation as fairly presented below help explain why people or very bad. Lenders sell payday loans that are packaged as a two-week product, although the borrower ends up indebted for ve months on average. And then the any terms offered second time I did it, because I was desperate, where I ended up having to like extend it, because I needed that money to live on, and then extend it again. And I got in sort of over my head, where it’s like now I owe all this money, and you’re going to take basically my whole check. I To some focus group respondents, a was already, you know, my limit was payday loan, as marketed, did not seem getting kind of there. They were already in debt much, and then it becomes another and struggling with regular expenses, bill, because that’s essentially what and a payday loan seemed like a way to will happen. If I’m paying over six months, it’s just another bill, like get a cash infusion without creating an I have another extra cable bill or additional bill. Previous “By my next paycheck, I should research has found that people across be done. A loan full repayment—does not reduce the from a state-licensed lender or federally amount owed, leaving them no closer to chartered bank that is marketed as a eliminating the debt. Therefore relying on two-week product serves to confrm an the lender for accurate information makes overly optimistic perspective, signaling the ultimate cost and duration of the debt to borrowers that it is realistic for them extremely diffcult to predict. Lenders’ advertising heavily promotes the concept of relying on and trusting Borrowers Rely Heavily on them. One bank describes itself in a payday loan advertisement as “your Payday Lenders, Whose 27 trusted source” and suggests you Loans Appear to Last for 28 “work with a lender you trust. In the example of Colorado, where the Washington, a payday loan’s term is for default loan structure is for a 180-day two weeks with a lump-sum repayment, term, but borrowers can pay back the and, as in most states, the majority loans (with no pre-payment penalty) in of payday users re-borrow the loans two weeks or any other amount of time. But unlike most states, Only 1 in 7 pay the loans back in full Washington gives borrowers a no-cost within a month, with the majority instead option to convert the loan immediately accepting the default installment loan 36 39 into a far more affordable 90- to 180-day structure. In 9 of 10 in the behavioral economics literature, instances, however, borrowers fail to do so, people tend to accept fnancial products as instead accepting the unaffordable default they are offered, relying on the structure 38 loan structure provided by the lender. Payday borrowers are no that even when a payday loan could exception, overwhelmingly accepting become affordable for borrowers through the default loan structure that the lender conversion to an installment loan, the provides them and demonstrating a default structure provided by the lender is tremendous degree of reliance on the so infuential that most borrowers do not lender, even when they cannot afford the alter that structure. So when that happened I was just fee charged per $100 borrowed per pay like, ‘Okay, so now what?

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To the extent that lenders that make proposed covered loans become subject to the review process cash payday loan company, the Bureau believes that they may be able to justify higher return rates by arguing that their rates are consistent with the rates for their market as a whole secure payday loan. As discussed in Market Concerns— 748 Payments online payday loan no fax, the Bureau’s evidence indicates that for the proposed covered loans studied, after a second consecutive attempt to collect payment fails, the third and subsequent attempts are very likely to fail. The Bureau therefore believes that two consecutive failed payment attempts, rather than four presentment attempts per month, is the appropriate point at which to trigger the rule’s payment protections. In addition, the Bureau believes that in many cases in which the proposed prohibition would apply, the consumer may technically be in default on the loan, given that the lender’s payment attempts will have been unsuccessful. Thus, the suggestion to permit a large number of payment withdrawal attempts when a loan is in default could effectively swallow the rule being proposed. This applies to the scenario in which a lender’s very first attempt to collect payment on a covered loan fails. This proposed provision sets forth the general principle that any failed payment transfer that follows a 749 successful payment transfer is the first failed payment transfer for the purposes of the prohibition in proposed § 1041. Put another way, an intervening successful payment transfer generally has the effect of resetting the failed payment transfer count to zero. As discussed in detail below, once the proposed prohibition on future transfers applies, a lender would be permitted under proposed § 1041. Proposed comment 14(b)(2)(i)-1 provides two illustrative examples of a first failed payment transfer. Proposed comment 14(b)(2)(ii)-1 provides an illustrative example of the general concept of a second consecutive failed payment transfer, while proposed comment 14(b)(2)(ii)-2 provides an illustrative example of a previous payment transfer initiated at the same time and on the same day. Given the high failure rates for same-day presentments discussed in Market Concerns—Payments, the Bureau believes it is important to clarify that the prohibition is triggered when two payment transfers initiated on the same day, including concurrently, fail. The Bureau seeks comment on what additional provisions may be appropriate to clarify how the prohibition applies when a lender 750 initiates multiple payment transfers on the same day or concurrently and two of those payment transfers fail. In particular, the Bureau seeks comment on what provisions may be appropriate to address situations in which a lender elects to initiate more than two payment transfers so close together in time that the lender may not receive the two returns indicating that the prohibition has been triggered prior to initiating further payment transfers. In addition to the comments discussed above, proposed comment 14(b)(2)(ii)-3 clarifies that when a lender initiates a single immediate payment transfer at the consumer’s request pursuant to the exception in § 1041. The Bureau believes this limitation is necessary, given that the authorization for an immediate transfer is based on the consumer’s understanding of her account’s condition only at that specific moment in time, as opposed to its condition in the future. In addition to the requests for comment above, the Bureau seeks comment on all aspects of the proposed provisions for determining when a failed payment transfer is the second consecutive failed payment transfer for purposes of the prohibition in § 1041. In particular, the Bureau seeks comment on whether the rule should include provisions to address situations in which lenders, after a first failed payment transfer, initiate a payment transfer or series of payment transfers for a substantially smaller amount. In addition to this proposed anti-evasion example, the Bureau seeks comment on whether the rule should specifically provide that, after a first failed payment transfer, initiating a successful payment transfer or series of payment transfers for a substantially smaller amount (but larger than a nominal amount) tolls the failed payment transfer count at one, rather than resetting it to zero, given that such an amount may not sufficiently indicate that the consumer’s account is no longer in distress. If so, the Bureau also seeks comment on what amount may be appropriate for a substantially smaller amount, such as any amount up to 10 percent of the first failed payment transfer’s amount, or whether a higher amount threshold up to 25 percent or more is needed to indicate to the lender that the account is no longer distressed. Specifically, it would provide that a failed payment transfer meeting the conditions in proposed § 1041. Proposed comment 14(b)(2)(iii)-1 would provide an illustrative example of this concept. As discussed in detail in connection with each proposed provision, below, the Bureau believes that requiring that the key terms of each transfer be clearly communicated to the consumer before the consumer decides whether to grant authorization will help to assure that the consumer’s decision is an informed one and that the consumer understands the consequences that may flow from granting a new authorization and help the consumer avoid future failed payment transfers. The Bureau believes that, when this is assurance is provided, it no longer would be unfair or abusive for a lender to initiate payment transfers that accord with the new authorization, at least until such point that the lender initiates two consecutive failed payment transfers pursuant to the new authorization. The Bureau recognizes that in some cases, lenders and consumers might want to use an authorization under this exception to resume payment withdrawals according to the same terms and schedule that the consumer authorized prior to the two consecutive failed attempts. In other cases, lenders and consumers may want to establish a new authorization to accommodate a change in the payment schedule—as might be the case, for example, when the consumer enters into a workout agreement with the lender. Accordingly, the proposed exception is designed to be sufficiently flexible to accommodate both circumstances. In either circumstance, however, the 754 lender would be permitted to initiate only those transfers authorized by the consumer under § 1041. Proposed comment 14(c)-1 provides a summary of the exception’s main provisions and note the availability of the exception in § 1041. Proposed comment 14(c)(1)-1 explains that the consumer’s authorization required by § 1041. The Bureau notes, for example, that an authorization obtained pursuant to proposed § 1041. However, in cases where lenders and consumers wish to resume payment transfers via preauthorized electronic fund transfers as that term is defined in Regulation E, the Bureau believes that, given the high degree of specificity required by proposed § 1041. The Bureau seeks comment on whether and, if so, what types of additional provisions may be appropriate to clarify whether and how an authorization obtained pursuant to proposed § 1041. In addition, the Bureau seeks comment on whether additional provisions may be appropriate to clarify how the authorization requirements in proposed § 1041. The Bureau believes that 756 requiring lenders to explain these key terms of each transfer to consumers when seeking authorization will help to ensure that consumers can make an informed decision as between granting authorization for additional payment transfers and other convenient repayment options, such as payments by cash or money order, “push” bill payment services, and single immediate payment transfers authorized pursuant to proposed § 1041. In addition, if a lender wishes to obtain permission to initiate ongoing payment transfers from a consumer whose account has already been subject to two consecutive failed attempts, the Bureau believes it is important to require the lender to obtain the consumer’s agreement to the specific terms of each future transfer from the outset, rather than to provide for less specificity upfront and rely instead on the fact that under proposed § 1041.

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