No-cost payment plans on payday loans ‘not working as intended,’ CFPB charges in report

Few payday loan borrowers are benefiting from no-cost extended payment plans, but instead are paying for costly loan rollovers, according to a report published Wednesday by the federal consumer financial protection agency.

The Consumer Financial Protection Bureau (CFPB) said the extended payment plans, which are required to be offered to borrowers in most states that do not prohibit payday lending, are meant to help borrowers exit the cycle of rollovers and fees. Still, the agency asserted, the payday loan industry continues to rely on high rollover rates and fees.

In that regard, CFPB said, payday lenders use deceptive practices to “drive cycles of costly reborrowing.”

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

The bureau said that in 16 of the 26 states where payday lending is not prohibited, payday lenders are required to offer no-cost extended payment plans. Those plans, the agency said, allow a borrower to repay only the principal and fees already incurred, splitting the remaining balance over several months.

The alternative, for those who choose not to repay their loans, is to roll over the loan, which the CFPB indicated is costlier because the borrower’s loan is renewed for another pay period and the borrower is charged an additional payday loan fee.

Using a typical $300 loan as an example, the bureau said a borrower would pay $45 in rollover fees every two weeks until the borrower can pay off the principal and incurred fees. After four months, the CFPB said, the borrower would have paid $360 in rollover fees and still owe the original $300.

The CFPB said its previous research found that most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal.

“The savings of a no-cost extended payment plan can be substantial,” the bureau said. “If the same borrower opted for a no-cost extended payment plan at the time of the first rollover, they would only have to pay $345 over an extended period,” the agency added.

The bureau listed three “substantial differences” among the 16 states that require lenders to offer no-cost payment options:

  • The no-cost extended payment plans vary substantially. However, among other things, a typical feature is that there be no additional fees charged for an extended payment plan.
  • Usage rates for extended no-cost extended payment plans are low in all states.
  • The pandemic has affected payday loan volumes, but not no-cost extended payment plan usage.

CFPB Finds Payday Borrowers Continue to Pay Significant Rollover Fees Despite State-Level Protections and Payment Plans