2023 Year in Review: Payday and Small-Dollar Lending

Looking Ahead to 2024

Regulators may take additional regulatory and enforcement action relating to junk fees in light of the October 2023 White House announcement concerning a “crack down” on junk fees. There may also be an update on the status of the CFPB’s Payday Lending Rule, which remains invalid in the wake of the Fifth Circuit’s decision and pending the Supreme Court’s decision on the constitutionality of the CFPB’s funding mechanism.

Key Trends from 2023

In 2023, Goodwin monitored seven enforcement actions related to small-dollar or payday loans, the same number of actions that Goodwin monitored in 2022. The past two years represent a significant drop from activity in this space compared to the six preceding years.

In the News

CFPB Issues Supervisory Highlights Report Regarding Junk Fees Charged in Connection with Payday and Small-Dollar Lending

In March, the CFPB issued a special edition of its Supervisory Highlights, “Supervisory Highlights: Junk Fees Special Edition,” scrutinizing “exploitative fees charged by banks and financial companies, commonly referred to as ‘junk fees.’” The report covers examinations involving junk fees in the areas of auto servicing, mortgage servicing, payday and small-dollar lending, deposits, and student loan servicing between January 11, 2022, and February 1, 2023. Section 2.4 of the report covers payday and small-dollar lending. The Bureau identified the following unfair acts or practices on the part of the subject lenders. First, lenders acted unfairly by splitting missed payments “into as many as four sub-payments” after unsuccessful debit attempts and simultaneously “represented them to consumers’ banks for payment via debit card” without consumer authorization, resulting in “overdraft fees, indirect follow-on fees, unauthorized loss of funds, and inability to prioritize payment decisions.” Second, the Bureau determined that lenders “charged borrowers fees to retrieve personal property from repossessed vehicles and to cover servicer charges, and withheld the personal property and vehicles until borrowers paid the fees.” As a result, borrowers were denied access to, or subject to destruction of, property such as medical equipment or vehicles. Finally, the report stated that lenders engaged in unfair acts or practices by “failing to stop vehicle repossessions before title loan payments were due as-agreed, and then withholding the vehicles until consumers paid repossession-related fees and refinanced their debt.” As a result, consumers were deprived of their means of transportation and the contents of their vehicles. The report highlights the specific areas that the Bureau has focused on in examinations of payday and small-dollar lenders and serves as a road map for potential enforcement activity.

CFPB Issues Report Examining Medical Credit Cards and Financing Plans

In May, the CFPB issued a report, “Medical Credit Cards and Financing Plans,” examining medical credit cards and loans used for basic medical treatment and emergency healthcare for “families and individuals struggling to pay their out-of-pocket healthcare expenses” and setting forth some of the potential regulatory issues surrounding these products. The report focused on “point-of-sale credit products, including medical credit cards and installment loans, that were once used primarily for elective care but now cover everything from emergency visits and specialty care to regular checkups.” The CFPB found that the scope of medical credit cards and loans, while typically restricted to paying for elective procedures, has recently expanded, and such products are now offered for emergency healthcare and basic medical treatment. The report also stated that medical credit cards are marketed to healthcare providers as having “cost-saving features” so patients can afford more expensive treatment. Additionally, the Bureau noted that many of these products offer “deferred” or “springing” interest, so if a consumer has a remaining balance after the designated promotional period, the consumer is “charged all the interest that would have accrued since their original purchase date.” The report also noted that these products may be targeted to at-risk populations by further concluding that patients who are potentially eligible to receive reduced care through their insurance plans or a financial assistance program are often signed up for a medical credit card or a loan. Finally, the Bureau stated that the “terms of credit” for medical credit cards and financing plans vary significantly in terms, including the length of the financing period and APRs. The report builds on prior CFPB literature concerning medical debt and credit reports, including the Bureau’s Data Point publication “Consumer Credit and the Removal of Medical Collections from Credit Reports” (April 2023) and the Consumer Credit Trend report “Paid and Low-Balance Medical Collections on Consumer Credit Reports” (July 2022).

White House Announcement on Junk Fees

In October, the Biden-Harris administration, joined by FTC Chair Lina Khan and CFPB Director Rohit Chopra, announced a “crack down” on junk fees in an effort to “bring down costs for American consumers.” President Biden urged federal agencies, Congress, and private companies to work on reducing junk fees to provide consumers with complete upfront information on the cost of credit. In conjunction with this announcement, the FTC announced that it is proposing a rule that would “ban businesses from running up the bills with hidden and bogus fees [and] ensure consumers know exactly how much they are paying and what they are getting.” The rule would also require companies to disclose upfront whether fees are refundable. And the CFPB issued an advisory opinion “regarding a provision enacted by Congress which generally prohibits large banks and credit unions from imposing unreasonable obstacles on customers, such as charging excessive fees, for basic information about their own accounts.”

2023 Enforcement Highlights

CFPB Enters Into $15 Million Settlement With ‘Repeat Offender’ Resolving Allegations of Military Lending Act Violations

In February, the Bureau entered into a consent order with TMX Finance LLC, known as TitleMax, resolving allegations that the title lender engaged in unfair practices and predatory lending targeted at military families. This was the CFPB’s second enforcement action against TitleMax in recent years. In 2016, TitleMax entered into a consent order with the CFPB to resolve claims that it had misrepresented the true cost of its loans to consumers who had renewed their title loans multiple times. In this action, the CFPB alleged that the lender violated the Military Lending Act (MLA), which, in relevant part, prevents nonbank creditors from using vehicle titles to secure loans to active-duty service members and other dependents, by (1) extending and servicing prohibited title loans to active-duty service members or their dependents; (2) extending and servicing prohibited loans that exceeded the 36% military annual percentage rate cap to active-duty service members or their dependents; (3) extending and servicing loans to active-duty service members or their dependents that demand unreasonable notice as a condition for legal action and impose onerous legal notice provisions in the case of a dispute; (4) extending and servicing loans to active-duty service members or their dependents without making the requisite disclosures; and (5) extending and servicing loans to active-duty service members or their dependents with prohibited arbitration provisions. Additionally, the CFPB alleged that the lender violated the Consumer Financial Protection Act of 2010 (CFPA) by charging borrowers “non-file insurance fees” (e.g., insurance that “covers losses due to the lender’s failure to record its lien on the vehicle title and thereby perfect its security interest”) and TILA by understating and inaccurately disclosing information to borrowers. Under the consent order, TitleMax agreed to pay $5.05 million in relief to consumers and a $10 million civil money penalty.

CFPB Enters into Consent Order with Nonbank Installment Lender for CFPA Violations

In May, the CFPB entered into a consent order with OneMain Financial Holdings LLC; OneMain Financial Group LLC; OneMain Financial (HI) Inc.; OneMain Financial Inc.; and OneMain Financial of Minnesota, Inc. for allegedly misrepresenting to consumers that they could not receive a loan without signing up for an add-on product and for retaining approximately $10 million in interest charges despite telling borrowers that they would receive a full refund on purchases if they canceled within a particular period. The lender offers installment loans, which consumers repay in equal payments over a period of months or years, as well as add-on products such as identity theft coverage, roadside assistance, discounts on entertainment, and unemployment coverage. The Bureau claimed in its press release announcing the consent order that the lender incentivized its employees to “upsell borrowers on every loan” by offering add-on products. The CFPB determined that these practices violated the CFPA and ordered the lender to pay at least $10 million in consumer redress and a $10 million civil money penalty. The consent order also required that the lender adjust its policies to ensure that cancellation of add-on products is easier and include interest in refunds after add-on product cancellation.

CFPB Sues Lease-to-Own Finance Company for CFPA Violations

In July, the CFPB sued a lease-to-own finance company in the U.S. District Court for the District of Utah for allegedly “deceiving consumers, obscuring the terms of its financing agreements, and making false threats.” The company allegedly engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA in connection with product advertising, product terms, and debt collection. In the complaint, the Bureau also alleged that the company’s lease-to-own agreements were an extension of “credit,” subject to TILA, and as a result, the company had violated EFTA by requiring that consumer repay their “loans” through preauthorized electronic funds transfers. The company’s motion to dismiss remains pending.

CFPB Enters into Consent Order with Nonbank Consumer Finance Company

In September, the Bureau entered into a consent order with Tempoe, LLC, a nonbank consumer finance company that offers lease-purchase agreements at the point of sale to consumers at major retailers. The Bureau claimed that consumers were typically offered Tempoe, LLC’s product after applying for financing through the retailer and being rejected, and that the in-store application process was designed so a consumer’s approval by the company was virtually contemporaneous with the financing rejection. In the press release announcing the consent order, the Bureau stated that the company “hid[] the true nature of the agreements” and “tricked consumers into signing the leases [so that] consumers found themselves unable to return products and on the hook for unexpectedly large payments.” The company purportedly entered into approximately $1.85 million in agreements with consumers during the relevant period of time — defined as from “at least” 2015 to April 1, 2022. The consent order permanently banned the company from offering consumer leases, required the company to close each of its outstanding accounts, and ordered the company to allow consumers to keep leased merchandise with no further payment (representing $33.6 million in released payments). The company was also required to pay a $2 million civil money penalty.

CFPB Enters into Consent Order with Online Small-Dollar Lender for Alleged Violation of 2019 Consent Order

In November, the Bureau entered into a consent order (2023 order) with an online, publicly traded small-dollar lender for allegedly debiting consumers’ bank accounts without authorization and failing to honor loan extensions in violation of the CFPA. A prior consent order (2019 order) between the Bureau and the lender alleged that the lender engaged in similar conduct and prohibited the lender from “making or initiating electronic fund transfers from a consumer’s bank account on a recurring basis” without satisfying certain conditions. The 2019 order also enjoined the lender from “[d]ebiting or attempting to debit any consumer’s bank account without having obtained the consumer’s express informed consent,” “[f]ailing to honor loan extensions granted to consumers,” and “[d]ebiting the full payment instead of a loan extension fee to consumers granted a loan extension.” The Bureau issued the 2023 order based on alleged violations of the above provisions of the 2019 order. The 2023 order prohibits the lender from offering or providing particular types of loans, requires the lender to comply with the CFPA and other relevant laws and regulations, and requires the lender to develop compliance policies and procedures for its executive compensation policies. The lender will also pay redress to consumers and a $15 million civil money penalty.

Click to access all 12 chapters of our Consumer Financial Services 2023 Year in Review, including a market overview about the industry overall and chapters on 11 industry segments. 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.