Payday lenders steer borrowers toward more expensive repayment options, CFPB says

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Many payday loan borrowers are not taking advantage of the lowest-cost repayment option in states where it’s available, perpetuating a cycle of high fees and debt, the Consumer Financial Protection Bureau said in a report Wednesday.

In some cases, payday lenders have withheld information from borrowers about these “free extended repayment plans” to generate more revenue, the federal agency claimed.

The Dodd-Frank Act established the CFPB in the wake of the Great Recession to protect consumers from unfair, abusive and deceptive financial practices.

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“Our research suggests that state laws that require payday lenders to offer free extended repayment plans are not working as intended,” Rohit Chopra, the bureau’s director, said in a written statement. “Payday lenders have a strong incentive to protect their earnings by directing borrowers to expensive new loans.”

The Community Financial Services Association of America, a trade group representing payday lenders, has not responded to a request for comment as of press time.

Payday loans are generally short-term, high-cost loans that mature in a single payment on a borrower’s next payday.

According to the CFPB, 26 states allow such lending, and more than 12 million people borrow money each year.

Rohit Chopra, director of the Consumer Financial Protection Bureau.

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The median payday loan is about $350 and the typical fee is an average interest rate of 391%, according to the CFPB.

Those unable to repay on time can pay a fee to extend their due date via a “rollover.” The rollover fee is not counted against the loan amount. Extensions can serve to keep payday borrowers in debt, the CFPB said.

Sixteen states require lenders to offer “free extended payment plans” as an alternative, the CFPB said. These plans allow borrowers to repay their loan in multiple installments rather than a single payment, the CFPB said.

Here’s a comparison of the CFPB’s two types of repayment options: someone taking out a typical $300 loan would pay $45 every two weeks to roll over the loan; After four months, they would have paid $360 in rollover fees and still owe the original $300. If the same person initially opts for the free payment plan, they will pay a total of $345 over that period.

But those payment plans are underused in states where they are available, according to the report, which the CFPB says is the first to compare usage between states.

For example, usage rates range from less than 1% of borrowers in Florida to 13.4% in Washington state, according to the report.

“Despite the proliferation of state laws providing free enhanced payment plans, the data shows that rollover and failure rates consistently exceed usage rates for enhanced payment plans,” the agency wrote. “The Bureau has noted that monetary incentives encourage lenders to encourage more costly rollovers at the expense of expanded payment plans.”

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