On April 20, 2016, the Consumer Financial Protection Bureau (CFPB) issued a report regarding online payday lenders’ efforts to debit payments from a borrower’s checking account. Based on an 18-month observation period, the report focused on the hidden costs of online payday and installment loans provided by over 330 lenders.
The report is the latest effort by the CFPB to increase its regulatory foothold in the payday loan industry since it began supervising payday loan lenders in January 2012. To date, the report marks one of the most comprehensive studies on the industry.
The report’s key findings include:
- Half of online borrowers are charged an average of $185 in bank penalties such as overdraft and non-sufficient fund (NSF) fees.
- Repeated attempts by a lender to debit a borrower’s account are likely to fail. After an initial failed payment request, 70 percent of second payment requests to the same consumer account fail. Third-payment attempts have an even higher failure rate of 73 percent. Subsequent payment requests are even less likely to succeed.
- Online borrowers hit with a bank penalty are more likely to lose their account. Depository institutions may close a bank account if the borrower has a negative balance for an extended period of time or if the account racks up too many penalty fees. Over the observation period, 36 percent of accounts with a failed debit attempt from on online lender were closed by the depository institution.
While the report stops short of providing an opinion regarding payday loans, the CFPB is acutely aware of the consequences that consumers face when using these products. “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.”
Thus, the findings of the report are even more significant because it is possible that the CFPB will attempt to address these issues in the new rule. The CFPB anticipates that it will issue a proposed rule later this spring.