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CFPB: Half of Online Payday Borrowers Accumulate Average $185 in Bank Penalties
Wednesday, April 20, 2016 6:30 AM

Repeat Debit Attempts Add Steep, Hidden Cost for Borrowers Yet Typically Fail to Recover Payments

On Tuesday the Consumer Financial Protection Bureau issued a report finding that attempts by online lenders to debit payments from a consumer’s checking account add a steep, hidden cost to online payday loans. Half of online borrowers rack up an average of $185 in bank penalties because at least one debit attempt overdrafts or fails. One third of those borrowers who get hit with a bank penalty wind up having their account closed involuntarily. The study also found that despite this high cost to consumers, lenders’ repeated debit attempts typically fail to collect payments.  

Read the full report.

Payday loans are typically marketed as a way to bridge a cash flow shortage between paychecks or other income. Also known as “cash advances” or “check loans,” they are usually high-cost loans that can offer quick access to money. Payment is usually due in full on the borrower’s next payday, although some lenders offer installment loans or longer-term loans with payments typically timed to coincide with the consumer’s next payday.

Tuesday’s report is based on data from an 18-month period in 2011 and 2012 that looked at online payday and certain online installment loans made by more than 330 lenders. It is a continuation of the CFPB’s reports on payday loans and deposit advance products, some of the most comprehensive studies ever undertaken on the market. Previous reports have raised questions about the lending standards and loan structures that may contribute to the sustained use of these products.

The report found:

  • Half of online borrowers are charged an average of $185 in bank penalties: One half of online borrowers have at least one debit attempt that overdrafts or fails. These borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts.
     
  • One third of online borrowers hit with a bank penalty wind up losing their account: A bank account may be closed by the depository institution for reasons such as having a negative balance for an extended period of time or racking up too many penalty fees. Over the 18-month period covered by the data, 36 percent of accounts with a failed debit attempt from an online lender ended up being closed by the depository institution. This happened usually within 90 days of the first non-sufficient funds transaction.
     
  • Repeated debit attempts typically fail to collect money from the consumer: After a failed debit attempt, three quarters of the time online lenders will make an additional attempt. Seventy percent of second payment requests to the same consumer’s account fail. Seventy-three percent of third payment requests fail. And, each repeated attempt after that is even less likely to succeed.

The report will help educate regulators and the public about how the payday and installment lending markets work and about the behavior of borrowers in the market. The CFPB has authority over the payday loan and payday installment loan markets. It began its supervision of payday lenders in January 2012. In November 2013, the CFPB began accepting complaints from borrowers encountering problems with payday loans. Last month, it began accepting complaints about online marketplace lenders.

Last year the Bureau announced it was considering a proposal that would prohibit payday lenders and similar lenders from making more than two unsuccessful attempts in succession on a borrower’s checking or savings account. The Bureau is expecting to issue a proposed rule later this spring.