Online payday lenders are creating new hazards for borrowers, leading to large overdraft fees and even loss of access to checking accounts, federal regulators claimed Wednesday.
Online payday lenders often have direct access to borrowers' checking accounts for deposits and payments. When borrowers don't have sufficient funds in their accounts to pay the lenders, repeated withdrawal attempts made by lenders result in multiple non-sufficient funds charges averaging $185, the Consumer Financial Protection Bureau said.
Results of the study come as the bureau is about to release new rules regulating the industry.
"In one extreme case, we saw a lender that made 11 payment requests on an account in a single day," CFPB director Richard Cordray said while discussing the study, which analyzed 18 months of data from more than 330 online lenders.
Perhaps worse, many borrowers end up getting booted by their banks after such incidents within 90 days, the CFPB said.
"We found that over the study period, 36% of accounts with a failed debit attempt from an online lender ended up being closed by the bank or credit union," Cordray said. "Getting booted from the banking system can have far-reaching repercussions for consumers, leading to a downward spiral that costs them even more money and their precious time. It can be hard to get a new account at another bank. It can mean having to use expensive check-cashing and bill-paying services to cash their paychecks or their benefits checks or to pay their bills, services they used to take for granted."
Repeated debit attempts by online lenders usually fail — 70% of second attempts don't result in any collection, and further attempts fail even more — but there is some logic to why they try. In some cases, borrowers may not have the entire amount owned available in a checking account but might have part of it. A lender may first try to collect $300 and fail, but then might split that request up into three $100 debits and succeed in getting some of the money it's owed. The cost to lenders for additional requests is negligible, but each failed debit costs consumers $34, on average. The lender may apply additional fees as well.
Cordray's statements about the study suggest the CFPB's upcoming rules may be designed to restrict the practice.
"Last year, we began the process of reforming the market for small-dollar loans …The research paper we are publishing today sheds further light on these practices to help us better formulate needed reforms in this market," he said. "Each of these additional consequences of an online loan can be significant, and together they may impose large costs, both tangible and intangible, that go far beyond the amounts paid solely to the original lender. So the true costs of these loans, taken in the aggregate, must be kept in mind as we assess the effects on consumers, especially those who were already experiencing financial difficulties when they took out the loan in the first place."
Payday loans typically carry high annual percentage rates and fees. A good credit score can be instrumental in securing more affordable financing. You can see where your credit currently stands by viewing your two free credit scores, updated each month, on Credit.com.
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