CFPB Finds 'Steep Hidden Costs' from Online Payday Loans

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The Consumer Financial Protection Bureau has found that borrowers pay a "steep, hidden cost" in the form of unanticipated bank penalty fees and closed checking accounts when taking out online payday loans.

In a study to be released early Wednesday, the agency said that one third of consumers have their checking accounts closed involuntarily because of repeated attempts by online lenders to collect payment.

Half of consumers who take out online payday loans pay an average of $185 in bank penalties because at least one attempt to debit payment overdrafts or fails, the study found.

The CFPB is expected soon to issue a proposal on payday lending, which would be the first federal regulation of the small-dollar lending market. The research report, which excluded storefront payday lenders, provides insight into the bureau's thinking about how it might regulate online lenders.

CFPB Director Richard Cordray said taking out an online payday loan can result in "collateral damage" to a consumer's bank account.

"Bank penalty fees and account closures are a significant and hidden cost to these products," Cordray said in a press release. "We are carefully considering this information as we continue to prepare new regulations in this market."

Last year, the bureau said it was considering a proposal that would prohibit payday lenders from making more than two unsuccessful attempts in succession on a borrower's checking or savings account.

The study found that repeated attempts by lenders to collect money from a consumer failed, while each repeated attempt was "even less likely to succeed."

Online lenders typically use an automated network to deposit a loan into a borrowers' checking account; they collect on the loan by submitting a payment request to the borrower's depository institution.

The report, which focused on the costs to borrowers of multiple attempts to collect payment, analyzed 18 months of data from 2011 to 2012 on more than 330 online lenders.

The CFPB did not collect the information directly from online payday lenders. Instead, it analyzed Automated Clearing House payment requests made by a number of lenders that make online payday or other high-cost online loans. But it could not distinguish the type or structure of any given loan using payment requests, said Jesse Leary, a section chief in the CFPB's Office of Research.

The report found multiple costs to borrowers beyond the 300% to 400% interest rate charged by online payday lenders. Banks or credit unions typically charged a consumer $34 for an overdraft or insufficient fund fee in 2012. If a debit attempt is rejected, the online lender may also charge the borrower a late fee, a returned payment fee, or both.

Banks and credit unions may involuntarily close an account when the consumer has a negative balance for an extended period or when they have too many penalty fees.

"There are banks that have policies limiting the number of fees or overdrafts charged in a day," Leary said on a conference call Tuesday with reporters. "Some have limitations on the fees depending on the size of the transaction and if the account has gone negative."

The report found that 36% of accounts with one failed debit attempt from an online lender ended up being closed by a depository institution. The accounts usually were closed within 90 days of the first non-sufficient funds transaction.

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Law and regulation Payday lending Consumer banking