Progress Illinois examines a new report on the "hidden" costs of online payday loans as well as pending federal legislation seeking to crack down on "predatory" lending practices.
A consumer watchdog agency is warning borrowers about "steep, hidden" costs and bank account closures associated with online payday loans.
The Consumer Financial Protection Bureau (CFPB) released a report Wednesday on online payday lending, through which borrowers can obtain short-term access to credit. CFPB's analysis spanned 18 months of online payday lending data in 2011 and 2012.
During the study period, one half of borrowers had at least one overdraft or non-sufficient fund transaction when online payday lenders attempted to collect loan payments. Borrowers faced average bank fees of $185 for these unsuccessful debit attempts.
One third of online payday borrowers who had a failed debit attempt by an online lender ultimately had their checking or savings accounts closed by banks or credit unions. Such account closures typically happened within 90 days of the first failed payment. Financial institutions can close accounts when there are long-term negative balances or numerous penalty charges, among other reasons.
"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."
According to CFPB's analysis, payday loan borrowers incurred an average bank fee of $97 for the first failed payment request by an online lender and a $50 charge for the second unsuccessful debit attempt. When lenders submitted multiple payment requests on the same day, borrowers were slapped with an average charge of $39.
After an initial failed payment request, lenders typically make subsequent debit attempts.
"This is true despite the fact that so few of them succeed," said Cordray, noting that 70 percent of second debit attempts by lenders are unsuccessful. "If they keep at it, a third or subsequent attempt will fail at an even higher rate. Lenders may keep on dinging a consumer's account over and over again, with each ding costing the consumer a hefty bank fee."
These bank fees come in addition to any penalties from lenders, plus annual payday loan interest rates that can run between 300 percent and 500 percent, Cordray noted.
"Of course, lenders that are owed money are entitled to get paid back. But we do not want lenders to be abusing their preferential access to people's 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. Yet (Wednesday'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."
The Consumer Federation of America, an association of nearly 300 pro-consumer groups, was not surprised by the report's findings.
"These findings reinforce what consumer, civil rights and faith organizations across the country have said time and time again," said Tom Feltner, Consumer Federation of America's director of financial services. "Payday loans result in long-term financial hardship and pile on overdraft and other fees that put borrowers' financial security at risk ... We need strong and immediate action to require lenders to fully consider a borrowers' ability to repay a loan without re-borrowing, overdraft fees or other financial hardship."
Earlier this month, a group of U.S. Senate Democrats introduced a federal measure to address "predatory" payday lending practices, particularly those used by online lenders.
U.S. Sen. Jeff Merkley (D-OR) introduced the Stopping Abuse and Fraud in Electronic Lending Act of 2016, which has 12 Senate cosponsors, including Sens. Dick Durbin (D-IL), Elizabeth Warren (D-MA) and Democratic presidential candidate Bernie Sanders (I-VT), to name a few.
Under the measure, S.2760, payday lenders would be prohibited from withdrawing funds from borrowers' accounts through "remotely created checks," or RCCs, without their authorization.
The bill also addresses prepaid cards payday lenders use to issue loan money to borrowers. As part of the SAFE Lending Act, overdraft fees associated with these cards would be banned, and the CFPB would be tasked with "issu(ing) a rule banning any other predatory fees on prepaid cards," reads a news release from Merkley's office.
The proposal would further prohibit lead generators, or websites that generate customer leads for payday lenders, as well as "anonymously registered" payday lending websites. Additionally, all payday lenders would have to register with the CFPB in an effort to increase transparency.
"Even as our economy begins to show signs of recovery, many hardworking families are still struggling to make ends meet," Durbin said in announcing the SAFE Lending Act. "Unfortunately, many of these families are the targets of lenders offering payday loans with outrageous, often hidden interest rates that can have crippling effects on those who can afford it least. This bill will protect consumers and law-abiding lenders and I hope it can be brought to the floor quickly."
The legislation is currently pending in the Senate Banking, Housing and Urban Affairs Committee.