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By L. Ivan. University of Charleston. 2018.

These additional checks therefore also be rooted in real Some business models best payday loan direct lenders, notably may in turn slow down the approval behaviours if it is to be effective interest loan no payday. It may be necessary to able to combine customer acquisition consider other regulatory interventions Affordability is the key to producing and some elements of credit- and to prevent lenders with lesser more good outcomes and fewer bad identity-checking, reducing costs in underwriting criteria from out- outcomes. Of course, loans which are This leads to the conclusion that small actually behave, not how they say they correctly judged to be affordable at monthly payments are affordable, but will behave. This pragmatic approach is inception can end in default due to ‘bullet’-style repayments of interest plus obviously appealing. Losses due to than rely solely on lenders’ willingness default are an integral part of any Can we use these observed patterns of and ability to assess affordability. However, loans which repayment and default to help set the are unaffordable at inception will always level of the new rate cap? It can, however, be every two weeks, including interest and over without repaying their payday observed. Setting a cap at such a level Commission may be able to consult they avoid rolling over or refnancing, would encourage lenders to design lenders to work out an appropriate level borrowers often return to take a repeat products which ft how borrowers for the cap from the data. The evidence coming from Dollar Financial’s escalating losses Principal start of Repayment Principal Interest Monthly rate as rollovers have been curtailed period repayment repayment suggests that repayment of the full £300. The argument that business models can adapt but affordability cannot was advanced by Damon Gibbons of the Centre for Responsible Credit. In order payment from the lender to the to ensure affordability it may be borrower of any principal they have paid necessary to limit the maximum loan off a few weeks into the original term of size to a set percentage of income. The loan term is then extended and the repayments continue Limiting the number of loans as before. The borrower frequently outstanding ends up with a longer loan involving the Similarly, the cap will have most impact repayment of much more interest than on borrowers’ welfare if the number of they originally signed up for. Sometimes loans outstanding at any one time is the principal amount is increased above restricted. In some extreme cases Early Repayment Option borrowers have been reported fnding A high proportion of the cost of making themselves in a seemingly never-ending small-sum, short-term loans is cycle of debt. If been reported to impose large fees for the new cap is low, loans repaid early missed payments (Hartman 2013). Correlation between loan size and This could potentially lead to borrowers repayment behaviours facing a high total cost of credit if they Are small loans repaid more frequently repay early and subsequently take than large loans? This would raise the level small loans which would otherwise be of the cap slightly. This would need to be carefully controlled to avoid borrowers being required to take multiple small loans rather than one large loan in order to circumvent the cap. Conclusion Payday lending is currently causing capitalists, all with a much lower enormous consumer detriment and propensity to consume. Not only would harm, often to people who are among many payday borrowers have been the most beleaguered and vulnerable in better off without these loans but our our society. In 2012 stifed and products capable of borrowers spent over £900m on payday answering consumers’ needs cannot be loans, with £450m spent on loans which developed. Consumer detriment, in the forms of Appropriate regulation has the default, repeat borrowing and the potential to fx the payday lending taking of multiple loans from different market, which is currently failing due to lenders, appears to play a highly asymmetric information and poor proftable role in existing business product design. It seems that many payday total cost of credit, in particular, could loans serve only to increase the transform this industry. Large online lenders’ fnancial statements show that revenues continued to grow at a fast pace during 2012. Total revenues are therefore conservatively estimated to have been £900m for calendar year 2012. We do not We now extend the model to comment here on the timescale incorporate the effects of default. This • losses due to default are a cost to required for these model businesses to extended model is not intended to the business break even. As a responsible lender we won’t allow you to borrow more cash whilst your account remains in arrears. If you settle your outstanding balance we may consider future applications, but continued failure to address the issue will have a serious impact on your trust rating.

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For example payday loan с, several lenders require consumers to provide another form of account access in order to effectively revoke authorization with respect to a specific payment method—some lenders require consumers to provide this back-up payment method as part of the origination 790 agreement credit check payday loan. Some lenders require consumers to mail a written revocation several days before 791 the effective date of revocation. You must contact us at least three (3) business days prior to when you wish the authorization to terminate. If you revoke your authorization, you authorize us to make your payments by remotely- created checks as set forth below. Consumer complaints sent to the Bureau also indicate that consumers struggle with anticipating and stopping payment attempts by payday lenders. Complaints where the consumer has identified the issues “can’t stop lender from charging my bank account” or “lender charged my bank account on wrong day or for wrong amount” account for roughly 9 percent of the more 796 than 12,200 payday loan complaints the Bureau has handled since November 2013. Although the Bureau does not specifically collect information from consumers on the frequency of these issues in the nearly 24,000 debt-collection complaints related to payday loans or in the more than 9,700 installment loan complaints the Bureau has also handled, review of those complaints and complaints submitted by consumers about deposit accounts suggest that many consumers who No. The Bureau alleged that Hydra Group falsified loan documents to claim that the consumers had agreed to the phony online payday loans. In addition, as part of our information collection process, we may detect additional bank accounts under the ownership of the consumer. The other option for consumers is to direct their bank to stop payment, but this too can be challenging. Depository institutions typically charge a fee of approximately $32 for processing a 797 stop payment order, making this a costly option for consumers. In addition, some lenders 798 charge returned-item fees if the stop payment order successfully blocks an attempt. To execute a stop payment order on a check, banks usually use the check number provided by the consumer. Lenders may use a parent company name, abbreviated name, or vary names based on factors like branch location. Bank systems with limited 797 Median stop payment fee for an individual stop payment order charged by the 50 largest financial institutions in 2015. Although information has been obtained from the various financial institutions, the accuracy cannot be guaranteed. Some financial institutions impose additional procedural hurdles, for instance by requiring consumers to provide an exact payment amount for a stop payment order and allowing 800 payments that vary by a small amount to go through. Others require consumers to provide the 799 See Letter to Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, from the National Consumer Law Center, Consumer Federation of America, Center for Responsible Lending, Consumer Action, Consumers Union, National Association of Consumer Advocates, National Consumers League and U. Even if a consumer located a lender’s identification code on a previous debit, lenders may vary this code when they 802 are debiting the same consumer account. The Bureau believes that there is also some risk that bank staff may misinform consumers about their rights. In addition, some merchants (including lenders) are gaming the system by changing merchant identifiers to work around stop payments. However, the narrow scope of these rules, limited private network monitoring and enforcement capabilities over them, and applicability to only one payment method mean that they are unlikely to entirely solve problematic practices in the payday and payday installment industries. Reinitiation Cap 804 The Bureau has received complaints from consumers alleging that banks told consumers that the bank could not do anything about unauthorized transactions from payday lenders and that the bank would not stop future debits. Even if the rule were not subject to ready evasion by originating entities, the cap also does not apply to future payments in an installment payment schedule. And then the following payment due during the next month can proceed despite any prior failures. This return rate includes returns for reasons such as non-sufficient funds, authorization revoked by consumer, administrative issues (such as an invalid account number), and stop payment orders. Preliminary research, as part of the inquiry process, begins when any Originator exceeds the established administrative return rate or overall return rate level. Since private payment networks do not combine return activity, there is no monitoring of a lender’s overall returns across all payment types. The Bureau is also aware that lenders sometimes alternate between payment networks to avoid triggering scrutiny or violation of particular payment network rules. Particularly in light of payday lenders’ past behavior, the Bureau believes that substantial risk to consumers remains. One common example of this practice is for creditors to obtain a consumer’s authorization in advance to initiate a series of recurring electronic fund transfers from the consumer’s bank account.

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Proposed comment 7(c)(4)(i)-1 clarifies that emergency loan payday, in addition to the new loan online payday loan with no credit check, all covered short-term loans made under either proposed § 1041. The Bureau believes that a consumer who seeks to take out a new covered short-term loan after having taken out six covered short-term loans during a consecutive 12-month period may be exhibiting an inability to repay such loans. Under these circumstances, the Bureau believes that the lender should make an ability-to-repay determination in accordance with proposed §§ 1041. If the consumer were found to be ineligible for a covered short-term loan following the ability-to- 630 Market Concerns—Short-Term Loans; Levy & Sledge, at 12. The specific limit of six Section 7 loans in a consecutive twelve-month period in proposed § 1041. Two States have also placed a cap on the number of covered short-term loans a consumer can receive in a year. The Bureau seeks comment on whether it is appropriate to establish a Section 7 loan limit. The Bureau also seeks comment on whether six covered short-term loans made under proposed § 1041. The Bureau also seeks comment on the impact of the Section 7 loan limit on small entities. This proposed requirement would limit the consumer’s aggregate period of indebtedness on such loans during a consecutive 12-month period. Proposed comment 7(c)(4)(ii)-1 explains that, in addition to the new loan, the time period in which all covered short-term loans made under either § 1041. The Bureau believes it is important to complement the proposed six-loan limit with the proposed 90-day indebtedness limit in light of the fact that loan durations may vary under proposed § 1041. For the typical two-week payday loan, the two thresholds would reach the same result, since a limit of six-loans under proposed § 1041. For 30- or 45-day loans, however, a six-loan limit would mean that the consumer could be in debt for 180 days or 270 days out of a 12-month period. This result would be inconsistent with protecting consumers from the harms associated with long cycles of indebtedness. Given the income profile and borrowing patterns of consumers who borrow monthly, the Bureau believes the proposed Section 7 indebtedness limit is an important protection for these consumers. Consumers who receive 30-day payday loans are more likely to live on fixed 635 incomes, typically Social Security. Fifty-eight percent of monthly borrowers were identified 636 as recipients of government benefits in the Bureau’s 2014 Data Point. These borrowers are particularly vulnerable to default and collateral harms from making unaffordable loan payments. The Bureau has found that borrowers receiving public benefits are more highly concentrated toward the lower end of the income range. Nearly 90 percent of borrowers receiving public benefits reported annual incomes of less than $20,000, whereas less than 30 percent of employed 635 Due dates on covered short-term loans generally align with how frequently a consumer receives income. Consumers typically receive public benefits, including Social security and unemployment, on a monthly basis. Furthermore, because public 638 benefits are typically fixed and do not vary from month to month, in contrast to wage income that is often tied to the number of hours worked in a pay period, the Bureau believes monthly borrowers are more likely than biweekly borrowers to use covered short-term loans to compensate for a chronic income shortfall rather than to cover an emergency or other non- recurring need. The Bureau has found that borrowers on fixed incomes are especially likely to struggle with repayments and face the burden of unaffordable loan payments for an extended period of time. As noted in the Supplemental Findings on Payday Loans, Deposit Advance Products, and Vehicle Title Loans, for loans taken out by consumers who are paid monthly, more than 40 percent of all loans to these borrowers were in sequences that, once begun, persisted for the rest 639 of the year for which data were available. The Bureau also found that approximately 20 640 percent of borrowers paid monthly averaged at least one loan per pay period. In light of these considerations, the Bureau believes that a consumer who has been in debt for more than 90 days on covered short-term loans, made under either proposed § 1041. Under these circumstances, the Bureau believes that the lender should make an ability-to-repay determination in accordance with proposed §§ 1041. If the consumer were found to be ineligible for a covered short-term loan following the ability-to-repay determination, this would suggest that the Section 7 indebtedness limit was having its intended effect and that the consumer would not be able to afford another Section 7 loan. When calculating the three-month period, institutions should consider the customers’ total use of payday loans at all lenders.

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The rates of reborrowing and default on these loans indicate that many borrowers do struggle to repay these loans payday loan on savings account, and it is therefore reasonable to infer that many borrowers are suffering harms from making unaffordable payments particularly where a leveraged payment mechanism and vehicle security strongly incentivize consumers to prioritize short-term loans over other expenses payday loan advance. Harms Remain Under Existing Regulatory Approaches Based on Bureau analysis and outreach, the harms the Bureau perceives from payday loans, single-payment vehicle title loans, and other short-term loans persist in these markets despite existing regulatory frameworks. In particular, the Bureau believes that existing regulatory frameworks in those States that have authorized payday and/or vehicle title lending have still left many consumers vulnerable to the specific harms discussed above relating to reborrowing, default, and collateral harms from making unaffordable payments. Several different factors have complicated State efforts to effectively apply their regulatory frameworks to payday loans and other short-term loans. For example, lenders may adjust their product offerings or their licensing status to avoid State law restrictions, such as by shifting from payday loans to vehicle title or installment loans or open-end credit or by obtaining 520 licenses under State mortgage lending laws. For example, fourteen States and the District of Columbia have interest rate caps or other restrictions that, in effect, prohibit payday lending. Although consumers in these States may still be exposed to potential harms from short-term lending, such as online loans made by lenders that claim immunity from these State laws or from loans obtained in neighboring States, these provisions provide strong protections for consumers by substantially reducing their exposure to the harms from payday loans. The 36 States that permit payday loans in some form have taken a variety of different approaches to regulating such loans. Among other things, these restrictions may include caps on the total number of permissible loans in a given period, or cooling-off periods between loans. Some States prohibit a lender from making a payday loan to a borrower who already has an outstanding payday loan. For example, some States provide that a payday loan cannot exceed a percentage (most commonly 25 percent) of a consumer’s gross monthly income. Some State payday or vehicle title lending statutes require that the lender consider a consumer’s ability to repay the loan, though none of them specify what reinstatement of the State’s Check-Cashing Lender Law, under which payday lenders had been making loans at higher rates. See Diane Standaert & Brandon Coleman, Ending the Cycle of Evasion: Effective State and Federal Payday Lending Enforcement (2015), http://www. Some States require that consumers have the opportunity to repay a short-term loan through an extended payment plan over the course of a longer period of time. Additionally, some jurisdictions require lenders to provide specific disclosures to alert borrowers of potential risks. While these provisions may have been designed to target some of the same or similar potential harms identified above, these provisions do not appear to have had a significant impact on reducing reborrowing and other harms that confront consumers of short-term loans. In particular, as discussed above, the Bureau’s primary concern for payday loans and other short- term loans is that many consumers end up reborrowing over and over again, turning what was ostensibly a short-term loan into a long-term cycle of debt. The Bureau’s analysis of borrowing patterns in different States that permit payday loans indicates that most States have very similar rates of reborrowing, with about 80 percent of loans followed by another loan within 30 days, 522 regardless of the restrictions that are in place. In particular, laws that prevent direct rollovers of loans, as well as laws that impose short cooling-off periods between loans, such as Florida’s prohibition on same-day reborrowing, have very little impact on reborrowing rates measured over periods longer than one day. The 30-day reborrowing rate in all States that prohibit rollovers is 80 percent, and in Florida the rate is 89 percent. Several States, however, do stand out as having substantially lower reborrowing rates than other States. Likewise, the Bureau believes that disclosures are insufficient to adequately reduce the harm that consumers suffer when lenders do not determine consumers’ ability to repay, for two 523 primary reasons. First, disclosures do not address the underlying incentives in this market for lenders to encourage borrowers to reborrow and take out long sequences of loans. As discussed above, the prevailing business model in the short-term loan market involves lenders deriving a very high percentage of their revenues from long loan sequences. While enhanced disclosures would provide additional information to consumers, the Bureau believes that the loans would remain unaffordable for most consumers, lenders would have no greater incentive to underwrite more rigorously, and lenders would remain dependent on long-term loan sequences for revenues. Second, empirical evidence suggests that disclosures have only modest impacts on consumer borrowing patterns for short-term loans generally and negligible impacts on whether consumers reborrow. Evidence from a field trial of several disclosures designed specifically to warn of the risks of reborrowing and the costs of reborrowing showed that these disclosures had 524 a marginal effect on the total volume of payday borrowing. Analysis by the Bureau of similar disclosures implemented by the State of Texas showed a reduction in loan volume of 13 percent after the disclosure requirement went into effect, relative to the loan volume changes for the 525 study period in comparison States. The Bureau believes these findings confirm the limited 523 See also section-by-section analysis of proposed § 1041. In addition, analysis by the Bureau of the impacts of the disclosures in Texas shows that the probability of reborrowing on a payday loan declined by only approximately 2 percent once the disclosure was put in place. Together, these findings indicate that high levels of reborrowing and long sequences of payday loans remain a significant source of consumer harm even after a disclosure regime is put into place.

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In addition payday loan no checking account, analysis by the Bureau of the impacts of the disclosures in Texas shows that the probability of reborrowing on a payday loan declined by only approximately 2 percent once the disclosure was put in place cash advance payday loan services. Together, these findings indicate that high levels of reborrowing and long sequences of payday loans remain a significant source of consumer harm even after a disclosure regime is put into place. Further, as discussed above in Market Concerns—Short-Term Loans, the Bureau has observed that consumers have a very high probability of winding up in a very long sequence once they have taken out only a few 526 loans in a row. The contrast of the very high likelihood that a consumer will wind up in a long-term debt cycle after taking out only a few loans with the near negligible impact of a disclosure on consumer reborrowing patterns provides further evidence of the insufficiency of disclosures to address what the Bureau believes are the core harms to consumers in this credit market. In the Small Business Review Panel Report, the Panel recommended that the Bureau continue to consider whether regulations in place at the State level are sufficient to address concerns about unaffordable loan payments and that the Bureau consider whether existing State laws and regulations could provide a model for elements of the Federal regulation. The Bureau has examined State laws closely in connection with preparing the proposed rule, as discussed in part 526 As discussed above in this Market Concerns—Short-Term Loans, a borrower who takes out a fourth loan in a sequence has a 66 percent likelihood of taking out at least three more loans, for a total sequence length of seven loans, and a 57 percent likelihood of taking out at least six more loans, for a total sequence length of 10 loans. Moreover, based on the Bureau’s data analysis as noted above, the regulatory frameworks in most States do not appear to have had a significant impact on reducing reborrowing and other harms that confront consumers of short-term loans. For these and the other reasons discussed in Market Concerns—Short-Term Loans, the Bureau believes that Federal intervention in these markets is warranted at this time. The Bureau has not determined whether, as a general rule, it is an unfair or abusive practice for any lender to make a loan without making such a determination. In addition, the United States Office of the Comptroller of the Currency has issued numerous guidance documents about the potential for legal liability and reputational risk connected with lending that does not take account of borrowers’ ability to repay. The Bureau’s preliminary findings with regard to abusiveness and unfairness are discussed separately below. The Bureau is making these preliminary findings based on the specific evidence cited below in the section-by-section analysis of proposed § 1041. Abusiveness Under § 1031(d)(2)(A) and (B) of the Dodd-Frank Act, the Bureau may find an act or practice to be abusive in connection with a consumer financial product or service if the act or practice takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service or of (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service. It appears to the Bureau that consumers generally do not understand the material risks and costs of taking out a payday, vehicle title, or other short-term loan, and further lack the ability to protect their interests in selecting or using such loans. It also appears to the Bureau that lenders take unreasonable advantage of these consumer vulnerabilities by making loans of this type without reasonably determining that the consumer has the ability to repay the loan. Consumers lack an understanding of material risks and costs As discussed in Market Concerns—Short-Term Loans, short-term payday and vehicle title loans can and frequently do lead to a number of negative consequences for consumers, which range from extensive reborrowing to defaulting to being unable to pay other obligations or basic living expenses as a result of making an unaffordable payment. All of these—including the direct costs that may be payable to lenders and the collateral consequences that may flow from 250 the loans—are risks or costs of these loans, as the Bureau understands and reasonably interprets that phrase. The Bureau recognizes that consumers who take out a payday, vehicle title, or other short-term loan understand that they are incurring a debt which must be repaid within a prescribed period of time and that if they are unable to do so, they will either have to make other arrangements or suffer adverse consequences. The Bureau does not believe, however, that such a generalized understanding suffices to establish that consumers understand the material costs and risks of these products. Rather, the Bureau believes that it is reasonable to interpret “understanding” in this context to mean more than a mere awareness that it is within the realm of possibility that a particular negative consequence may follow or cost may be incurred as a result of using the product. For example, consumers may not understand that a risk is very likely to materialize or that—though relatively rare—the impact of a particular risk would be severe. As discussed above in Market Concerns—Short-Term Loans, the single largest risk to a consumer of taking out a payday, vehicle title, or similar short-term loan is that the initial loan will lead to an extended cycle of indebtedness. This occurs in large part because the structure of the loan usually requires the consumer to make a lump-sum payment within a short period of time, typically two weeks, or a month, which would absorb such a large share of the consumer’s disposable income as to leave the consumer unable to pay the consumer’s major financial obligations and basic living expenses. Additionally, in States where it is permitted, lenders often offer borrowers the enticing, but ultimately costly, alternative of paying a smaller fee (such as 15 percent of the principal) and rolling over the loan or making back-to-back repayment and reborrowing transactions rather than repaying the loan in full—and many borrowers choose this option. Alternatively, borrowers may repay the loan in full when due but find it necessary to 251 take out another loan a short time later because the large amount of cash needed to repay the first loan relative to their income leaves them without sufficient funds to meet their other obligations and expenses. This cycle of indebtedness affects a large segment of borrowers: as described in Market Concerns—Short-Term Loans, 50 percent of storefront payday loan sequences contain at least four loans. One-third contain seven loans or more, by which point consumers will have paid charges equal to 100 percent of the amount borrowed and still owe the full amount of the principal. And looking just at loans made to borrowers who are paid weekly, biweekly, or semi-monthly, 21 percent of loans are in sequences consisting of at least 20 loans. For loans made to borrowers who are paid monthly, 46 percent of loans are in sequences consisting of at least 10 loans. The evidence summarized in Market Concerns—Short-Term Loans also shows that consumers who take out these loans typically appear not to understand when they first take out a loan how long they are likely to remain in debt and how costly that will be for them. Payday borrowers tend to overestimate their likelihood of repaying without reborrowing and underestimate the likelihood that they will end up in an extended loan sequence. For example, one study found that while 60 percent of borrowers predict they would not roll over or reborrow their payday loan, only 40 percent actually did not roll over or reborrow.

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