Attempts by online lenders to debit payments from consumers' checking accounts add a steep, hidden cost to online payday loans, according to a Consumer Financial Protection Bureau report released Wednesday.
Half of online borrowers incur an average of $185 in bank penalties because at least one debit attempt overdrafts or fails. The agency said that one third of consumers have their checking accounts closed involuntarily because of repeated attempts by online lenders to collect payment.
The report is available here.
The report is based on data from an 18-month period in 2011 and 2012 that reviewed 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. Previous reports have raised questions about the lending standards and loan structures that may contribute to the sustained use of these products.
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 CFPB's thinking about how it might regulate online lenders.
Payday loans are commonly 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.
"Taking out an online payday loan can result in collateral damage to a consumer’s bank account," said CFPB Director Richard Cordray. "Bank penalty fees and account closures are a significant and hidden cost to these products. We are carefully considering this information as we continue to prepare new regulations in this market.”
The CFPB did not collect the information directly from online payday lenders but instead 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 also may charge the borrower a late fee, a returned payment fee or both.