Bringing banks into the battle over payday lending, the Consumer Financial Protection Bureau (CFPB) released a report finding that online payday loans "add a steep, hidden cost" to consumers by racking up bank fees.
The Bureau has had its eye on online payday lending for a while, but its new report focuses on the role of banks in online payday loan payments. Payday lenders often use the Automated Clearing House (ACH) network to deposit loan proceeds directly into borrowers' checking accounts and then collect payment through the same system, the CFPB explained.
Problems arise when a borrower's account lacks sufficient available funds at the time a lender submits an ACH payment request, however. The depository institution has the choice to fulfill the payment request—typically resulting in an overdraft fee—or to deny the request, likely causing the borrower to be charged a non-sufficient funds (NSF) fee as well as the possibility of a late fee, a returned payment fee, or both, by the lender, according to the report.
"Taking out an online payday loan can result in collateral damage to a consumer's bank account," CFPB Director Richard Cordray said in a statement about the report. "Bank penalty fees and account closures are a significant and hidden cost to these products."
Analyzing data on consumer checking accounts obtained from several large depository institutions spanning an 18-month period in 2011 and 2012, the CFPB report found the typical overdraft and NSF fees were $34.
Accounts with one or more loans from at least one of the identified online lenders made payments totaling on average $2,164, the Bureau said, although the data did not permit the agency to distinguish which portion of the payment went to cover fees, interest, or principal. But the same accounts were charged an average of $92 in overdraft and NSF fees by their institutions on payment requests for the payday lenders, according to the report.
Half of all accounts had at least one payment request resulting in an overdraft or failure due to NSF during the observation period, with an average charge of $186 in bank penalties on attempted payment requests from online lenders. Breaking down the $186 figure, the CFPB said on average $97 of the total was charged on payment requests that were not preceded by a failed payment request, with $50 charged when lenders re-presented a payment request after a prior failure, and $39 coming when a lender submitted multiple payment requests on the same day.
During the relevant sample period, the Bureau said more than one-third of the accounts had more than one overdraft and/or failed payment request and charged a mean total of $242 in overdraft and NSF fees on attempted payment requests from lenders.
The report found that subsequent payment requests to the same consumer account are "unlikely" to succeed. The vast majority of first requests for payment are successful (with just a 6% failure rate) but 70% of re-presentments fail, the Bureau said, with subsequent re-presentments even less likely to succeed. Of the successful 94% initial payment requests, 7% succeed based on the depository institution's decision to cover the payment as an overdraft; as the number of attempts increases, so do the odds of the bank covering the payment as an overdraft.
Other findings from the report: Many online lenders submit multiple payment requests on the same day, with 34% of all payment requests occurring on the same day as another request by the same lender. Cordray noted in his remarks that in "one extreme case, we saw a lender that made 11 payment requests on an account in a single day."
The CFPB also noted an increase in account closures. "Depository-initiated account closures are markedly higher for accounts with online payday loan use than for the overall sample," according to the report, 23% compared to 6%, respectively. "Moreover, accounts with failed online loan payment requests experience much higher rates of depository-initiated account closure than accounts with only successful payments." Closures typically occurred within 90 days of the first NSF transaction, the Bureau said.
To read the CFPB's report, "Online Payday Loan Payments," click here.
Why it matters
"Of course, lenders that are owed money are entitled to get paid back," CFPB Director Richard Cordray said in a call about the report. "But we do not want lenders to be abusing their preferential access to people's accounts. Borrowers should not have to bear the unexpected burdens of being hit repeatedly with steep, hidden penalty fees that are tacked on to the costs of their existing loans. Yet today's report shows that this is just what is happening to many consumers." The Bureau expects to publish a rule on payday lending later this spring with the possibility of a cap on the number of unsuccessful attempts in succession by a lender to debit a borrower's checking or savings account. This may further increase banks' attention on payday lending, even if banks are not directly involved in payday lending activities.