By Jeff Bater
April 20 — Borrowers who go online for payday loans are incurring an average of $185 in bank penalties because of debit attempts that result in overdraft or failure, according to a Consumer Financial Protection Bureau (CFPB) study highlighting concerns that might be addressed in an upcoming rule.
CFPB Director Richard Cordray said the bureau is “carefully considering” the findings of its latest research on payday lending as the agency continues to prepare new regulations in that market.
The CFPB is concerned lenders are offering small-dollar, short-term products without assessing the consumer’s ability to repay, and it has been working for a long time on a proposal addressing payday, auto title and similar lending products. Last year, it published an outline of payday lending proposals under consideration and has since been gathering feedback from industry. The agency expects to issue a proposed rule this spring.
The bureau's research, released in a report April 20, is based on data from 2011 and 2012 regarding payday and certain installment loans from online lenders.
“After analyzing 18 months of data on more than 330 online lenders, we have found that borrowers face steep, hidden costs to their online loans in the form of unanticipated bank penalty fees,” Cordray told reporters in a conference call on the report. “The research paper we are publishing today sheds further light on these practices to help us better formulate needed reforms in this market.”
Analysts said they think the CFPB's concerns with online lenders raised in its report, including lenders' access to customer bank accounts when collecting payments, will be reflected in the proposed rule. “We continue to expect that these concerns — which are not new — will be incorporated into coming rules for the payday and installment space,” Edward Mills, managing director at FBR & Co., said in a report.
Mills added that the CFPB proposal will likely track with the bureau's 2015 regulatory outline, which called for new upfront underwriting requirements, significant limits to sustained usage, and changing debt collection practices for the industry.
Consumer groups said the CFPB's newly released study reinforces their contention that payday loans result in long-term financial hardship, and they called on the bureau for action.
“The CFPB’s research is clear — direct access to a borrower’s bank account puts consumers’ checking accounts at risk,” said Tom Feltner, the director of financial services at the Consumer Federation of America, an umbrella organization for consumer groups in the U.S. “We need strong and immediate action to require lenders to fully consider a borrower's ability to repay a loan without reborrowing, overdraft fees or other financial hardship.”
Online lenders often use an automated network to deposit the loan amount into a borrower’s bank or credit union account, according to the CFPB. The lenders also collect their payments through the same automated networks by submitting payment requests.
“While traditional payday loans require a one-time payment within a relatively short period of time after the consumer obtains the loan, online payday loans take different forms,” Cordray said. “Some require a single payment. Some require a series of interest-only payments and a final balloon payment covering the entire principal amount. Some are repaid in installments with each payment scheduled to coincide with the consumer’s payday.”
If a borrower does not have enough money in his or her bank account, the bank can either make the payment and impose an overdraft charge or refuse the payment and assess a non-sufficient funds (NSF) charge. The CFPB study found half of online borrowers have at least one debit attempt that overdrafts or fails.
“These consumers are incurring an average of $185 in bank penalties,” Cordray said. “That is on top of any penalties the lender imposes, as well as the average annualized interest rate of 300 [percent] to 500 percent that is routinely charged on these kinds of loans.”
The bureau also found many online borrowers hit with an overdraft or NSF fee end up losing their checking or savings accounts altogether. Furthermore, 70 percent of second payment requests fail to collect any money, and later attempts are even less likely to succeed, the CFPB found.
“While it may cost the lender next to nothing to try to extract money from a consumer’s account, it can cost the consumer serious money,” Cordray said. “What our study found is that after one failed payment request, lenders try again three-quarters of the time. This is true despite the fact that so few of them succeed.
“Lenders may keep on ‘dinging' a consumer’s account over and over again, with each ‘ding' costing the consumer a hefty bank fee,” he said.
Lenders that are owed money are entitled to get paid back but should not abuse their preferential access to customers' bank accounts, Cordray said.
“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,” he said. “Yet today’s report shows that this is just what is happening to many consumers. We will consider this data further as we continue to prepare new regulations to address issues with small-dollar lending.”
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The CFPB announcement is available at http://src.bna.com/egm.
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