2024 Year In Review: Payday And Small-Dollar Lending – Corporate and Company Law

Welcome to the “Payday and Small-Dollar Lending”
chapter of our annual report, Consumer Financial Services: 2024 Year in
Review.

Looking Ahead to 2025

We expect the level of enforcement and regulatory activity in
the payday and short-term small-dollar loan space to decrease in
2025, at least at the federal level. The Consumer Financial
Protection Bureau (CFPB) was particularly active in this space
under the leadership of former Director Rohit Chopra, including
announcing interpretive rules and filing lawsuits related to
companies and industries that offer alternatives to traditional
payday and title loan products. Even if such scrutiny subsides, as
it did during the first Trump administration, we expect more
liberal-leaning states — such as California, New York, and
Massachusetts — to keep the payday and short-term
small-dollar loan industry in their crosshairs.

Key Trends From 2024

In 2024, Goodwin monitored 15 enforcement actions related to
payday or short-term small-dollar loans, an increase from the seven
such actions that Goodwin monitored in 2023. The total recoveries
in connection with such actions also increased year over year, from
$41.8 million in 2023 to $63 million in 2024.

In the News

CFPB Issues Interpretive Rule Identifying “Buy Now,
Pay Later” Lenders as “Card Issuers” Under
Regulation Z

In May, the CFPB issued an interpretive rule identifying
“Buy Now, Pay Later” (BNPL) lenders (i.e., lenders that
permit consumers to split purchases across multiple payments and
can require as little as a 25% down payment) as
“creditors” or “card issuers” for purposes of
Regulation Z, Subsection B. This requires such lenders to comply
with the consumer protection provisions set forth in Regulation Z.
The CFPB increased its focus on BNPL lenders beginning in 2021
after use of their products significantly increased. According to
the CFPB’s 2023 Making Ends Meet survey, 17% of consumers with
a credit record used BNPL for at least one purchase between
February 2021 and February 2022. Since 2021, the use of BNPL
products has only continued to increase, leading the bureau to
conclude that these products are essentially a digital replacement
for “conventional credit cards.” In response to this
interpretive rule, the Financial Technology Association (FTA) filed a
lawsuit against the CFPB in October, alleging, among other
things, that the CFPB exceeded its statutory authority. The CFPB answered the complaint in December 2024,
denying the FTA’s allegations. The case remains pending.

CFPB’s 2017 “Two Strikes and You’re
Out” Rule to Take Effect in March

In June, the CFPB announced that a regulation it
promulgated back in 2017 is now set to take effect in March 2025.
This “new protection” benefits payday loan borrowers. The
CFPB stated that the regulation, which adopts a rule known as the
“two strikes and you’re out” rule, was prompted by
the practice of lenders repeatedly attempting to withdraw money
from consumers’ accounts even when it was clear those accounts
were empty. The consumer would then be charged a fee for each such
failed attempt or, in some instances, the consumer’s account
would be closed. The “two strikes and you’re out”
rule prohibits lenders from trying more than twice to withdraw
money from a consumer’s account. If the two attempts are
unsuccessful, lenders would be permitted to make additional
attempts to withdraw only if the consumer specifically authorized
it. Due to lengthy litigation, the rule has yet to take effect.
That litigation, though, has since been resolved in the CFPB’s
favor, and the rule is now set to take effect in March 2025.

2024 Enforcement Highlights

FTC Reaches Settlement With Online Cash Advance
Provider

In January 2024, the Federal Trade Commission (FTC) announced its
settlement with an online cash advance
provider, FloatMe Corp., and its co-founders, resolving claims that the company violated the
FTC Act, Restore Online Shoppers’ Confidence Act, and Equal
Credit Opportunity Act (ECOA) by engaging in allegedly deceptive
marketing tactics and discriminatory practices. The FTC’s complaint alleged that the company
charged consumers a monthly membership fee and promised consumers
that they could instantly receive $50 cash advances but instead
allowed consumers to receive only $20 advances when they signed up
and charged extra fees for instant receipt of the cash advance. The
FTC also alleged that the company made it difficult for consumers
to cancel their subscriptions. This, the FTC alleged, resulted in
the cancellation process being “manual-only, delay-filled, and
error-ridden.” The FTC further alleged that FloatMe Corp.
discriminated against consumers who received public assistance such
as Social Security, military, and unemployment benefits by
declining advances to consumers whose income came from such public
assistance sources, despite still charging the consumers the
monthly fee. Under the settlement agreement, the company agreed to
pay $3 million to the FTC and to various injunctive relief,
including providing an easier method for cancellation and enacting
a fair lending program.

CFPB Sues Peer-to-Peer Emergency Credit Platform for
Alleged Violations of CFPA and FCRA

In May, the CFPB announced that it had filed a lawsuit against SoLo Funds Inc. in the
U.S. District Court for the Central District of California over
alleged violations of §§ 1031, 1036(a), 1054, and 1055 of
the Consumer Financial Protection Act (CFPA), 12 U.S.C.
§§ 5531, and 5536(a), 5564, 5565, and Section 607(b) of
the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681e(b).
SoLo provides a platform through which consumers can request and
obtain emergency small-dollar short-term loans from other
consumers. The complaint alleges that SoLo promoted no-interest and
no-cost loans but that virtually all loans on the platform required
paying a “lender tip fee” and/or a “donation
fee.” The CFPB also claims that the company serviced and
collected on loans that were void and uncollectible under multiple
state laws because the loans were made and/or brokered by an
unlicensed individual or entity and/or the loans exceeded state
usury limitations. Because of this, the CFPB claims that the
company “deceptively, unfairly, and abusively represented that
these loan amounts were due and attempted to collect and collected
on those loans.” Furthermore, the CFPB alleges that the
company misrepresented that missed payments would be reported to
the credit bureaus as derogatory marks and would negatively affect
the consumer’s credit score when the company never reported
derogatory information to credit bureaus. The court denied
SoLo’s motion to dismiss the CFPB’s complaint, and the case
remains pending.

Massachusetts Attorney General Enters Into Assurance of
Discontinuance With California Finance Company

In May, the Massachusetts attorney general announced that
it entered into an Assurance of Discontinuance (AOD) with
EasyPay, a California-based financing company, resolving
allegations that the company had violated the Massachusetts
Consumer Protection Act. The attorney general alleged that the
company engaged in a “rent-a-bank” scheme, whereby the
company partnered with an out-of-state bank in an attempt to
circumvent Massachusetts’ maximum loan interest rates of 20%.
Although the out-of-state bank retained title to these loans, the
attorney general alleged that EasyPay is actually the “true
lender” of these loans because the company had a 90%
participation interest in the loans, took on the risk of
nonperformance on the loans, provided the marketing and customer
service for the loans, and provided the underwriting model for the
loans. The attorney general further alleged that, since 2018, the
average annual percentage rate of the loans was more than 100%. The
AOD provides that EasyPay will cease making, facilitating, or
servicing loans in Massachusetts and will cease collection on all
active and defaulted loans in Massachusetts. The company also
agreed to pay $625,000 in restitution to Massachusetts
consumers.

California Department of Financial Protection and
Innovation Revokes Company’s License for Failing to Provide
Information During Regulatory Exam

In July, the California Department of Financial Protection and
Innovation (DFPI) issued an order revoking the California
Financing Law license of Synapse Credit LLC, a company that had
offered both individual and business loans in the state, following
that company’s alleged failure to provide information during
the DFPI’s attempt to conduct a regulatory examination. In
June, the DFPI commenced a regulatory examination of the company
and requested copies of the company’s books, records, reports,
and other corporate data. According to the DFPI, the company
provided no documents, and the DFPI was thus unable to conduct the
regulatory examination and confirm that the company was complying
with California law.

CFPB and “Rent-to-Own” Company Exchange
Lawsuits in a Race to the Courthouse

In July, Acima Digital LLC and Acima Holdings LLC (together,
Acima) — a virtual “rent-to-own” company — sued the CFPB in the U.S. District Court for
the Eastern District of Texas, seeking declaratory and injunctive
relief. Days later, the CFPB announced the filing of a complaint against Acima in the
U.S. District Court for the District of Utah related to its
“virtual rent-to-own” products. The complaint alleges
that the defendants used “misleading” marketing and
“abusive” enrollment practices that target consumers with
poor or limited credit, locking them into costly
“financings” of household goods disguised as lease
transactions. The complaint further alleges that Acima reported
inaccurate information about such “financings” to
consumer reporting agencies and that these lending activities have
been connected to as many as five million consumer financing
agreements since 2015. According to the CFPB, this alleged conduct
violated the CFPA, the Electronic Fund Transfer Act (EFTA),
Regulation E, the Truth in Lending Act (TILA), Regulation Z, and
Regulation V. The CFPB further alleges that the company’s
former CEO provided substantial assistance to Acima in violating
the CFPA.

Court Dismisses CFPB Lawsuit Against Separate
“Rent-to-Own” Company; CFPB Then Files Amended
Complaint

In a separate litigation matter involving Snap Finance —
another “rent-to-own” company — the U.S. District
Court for the District of Utah granted Snap Finance’s motion to
dismiss the CFPB’s complaint, holding that Snap Finance’s
leases were not extensions of credit under the CFPA, TILA, or EFTA,
and, therefore, the CFPB lacked jurisdiction to bring a claim for
alleged violations of those laws. The dismissal was without
prejudice. The CFPB thereafter amended its complaint. Snap
Finance’s motion to dismiss the CFPB’s amended complaint
remains pending.

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