Online Payday Loans Have ‘Hidden Costs’, Federal Report Says


Payday lenders have opened an online store – and it’s created a whole new set of problems for borrowers, according to a report of the Consumer Financial Protection Bureau (CFPB).

Online loan offers convenience and privacy that cannot be matched by a storefront transaction. This is why customers are turning to the Internet. The CFPB estimates that about half of the market for these small “cash advances” or “check loans” is now done digitally.

The office analyzed 18 months of data (2011-2012) on more than 330 online lenders and found that there can be serious consequences for those who cannot repay their loans on time.

“Taking out a payday loan online can result in collateral damage to a consumer’s bank account,” said Richard Cordray, director of CFPB. “Bank penalties and account closings represent a significant and hidden cost for these products. “

Internet lenders dispute the CFPB’s findings, pointing out that they are based on old data.

Read more: There are more payday lenders in the US than McDonald’s

“In the fast-paced world of internet lending, five years is an eternity, which is why many of the findings in this report are out of date,” said Lisa McGreevy, President and CEO of the Online Lenders Alliance. (OLA) in a “We think if the CFPB had conducted its study using current data, the result would have been very different. “

Payday loans seem simple enough

For someone who lives paycheck to paycheck, a high interest payday loan may be the only way to get money fast. Full payment is usually due on the borrower’s next payday, but some payday lenders now offer longer term installment loans.

Online lenders have direct access to their borrowers’ checking accounts through the Automatic Clearing House (ACH) network. They use the network to electronically deposit the loan money and then withdraw the payments when they are due.

“Their easy means of collection means they have tremendous power over a consumer’s bank account,” Cordray said during a telephone news briefing.

The problem arises when there is not enough money in the account to pay off the loan – an all too common situation.

The CFPB has found that half of all online payday loan borrowers have at least one debit attempt that overdrafts or fails. These accounts were billed an average of $ 185 in penalty fees over the 18 months studied.

If there is not enough money in the account to cover the payment, the bank can either make the payment and charge an overdraft fee, or decline the payment and charge an insufficient funds fee (NSF). If this happens, the payday lender may add late fees, repayment fees, or both.

But it does not stop there. If the initial request for payment is unsuccessful, most lenders will try to collect again. Each attempt can result in even more costs. The CFPB found that in an extreme case, a lender made 11 payment requests in a single day.

Read more: Data brokers sold payday loan applicants’ information to crooks, FTC says

Some lenders will respond to a non-payment by dividing the total amount into several smaller payment requests and sending them all out one day in the hope of getting at least some of their money back, according to the CFPB report. While one payment request of $ 300 could result in an overdraft or NSF charge, three requests of $ 100 could result in three penalty payments, or approximately $ 34 each when this analysis was performed.

Seventy percent of second payment requests to the same account fail, the CFPB found. Seventy-three percent of third payment requests fail. Every attempt after that is even less successful.

“Of course, lenders who are owed money have the right to be reimbursed, but we don’t want lenders to abuse their preferential access to people’s accounts,” Cordray said. “Borrowers shouldn’t have to bear the unexpected burden of being repeatedly hit with hidden and high penalty fees that add to the cost of their existing loans.”

Again, the online lending industry claims the market is not as bad as the CFPB report suggests.

Read more: Federal government plays down “debt trap” crackdown on payday loans

“Bank overdrafts are a loser for online lenders and their customers,” Lisa McGreevy of the Online Lenders Association (OLA) said in her statement. “Initiating a payment request on an account with insufficient funds does not help anyone: the lender does not get paid and the consumer is charged an NSF charge of $ 35 by his bank. “

McGreevy said new OLA rules and best practices now prohibit splitting payments or resubmitting them on the same day.

A financial institution can close a checking account if it has had a negative balance for too long or if the customer accumulates too many penalty fees.

Getting kicked out of your bank can have a big impact on someone who is already financially stressed. They may not be able to open an account at another bank or credit union, leaving them with no choice but to use expensive and time-consuming check-cashing and bill payment services.

Payment expected soon

Consumer advocates have always criticized payday lenders for what they believe to be predatory and abusive practices.

“Like payday loans from in-store lenders, online payday loans carry high interest rates, pull payments directly from the consumer’s bank account, and are made without regard to the repayment capacity of the bank. borrower, “said Tom Feltner, director of financial services at the Consumers Federation of America. “Payday loans cause long-term financial hardship and accumulate overdrafts and other fees that put the financial security of borrowers at risk.

Last year, the CFPB announced that it was considering new rules to protect consumers from predatory payday lending.

The bureau is expected to propose bans on payday lenders from making more than two failed attempts in a row on a borrower’s checking or savings account. It may also require payday lenders to consider a borrower’s ability to repay the loan, as is common practice with other loans.

The proposed rules are expected to be released later this spring.

the Center for Responsible Lending (CRL) urged the CFPB to issue strong protections to prevent “abusive payday lending practices” that keep millions of Americans “trapped in a vicious cycle of debt.”

“The CFPB has the ability to stop this debt trap by requiring lenders to ensure that the loan is affordable, taking into account the borrower’s income and expenses, to ensure that the loan can be refunded, ”said Diane Standaert of CRL. “All of America, including the working poor, deserves financial fairness.”

the CFPB accepts complaints about payday loans and lenders online and a information about these loans on its website.

Herb Weisbaum is the ConsumerMan. Follow him on Facebook and Twitter or visit The Consumer Man website.

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