"Online Payday Loan Payments," a new report published today by the CFPB, shows that consumers who use online payday loans often pay additional fees to their banks. Its findings underscore why the CFBP's proposed rule covering small-dollar lending deserves support.
One important fact to know about payday lending is that it is only utilized by people who are "banked." In order to receive a payday loan, a consumer must have a bank account. This is true regardless of whether a customer uses a retail storefront payday loan store or goes to an online lender.
The CFPB culled through data from loans made by 330 online payday lenders over a period of 18 months. The loans includes ones that were to be repaid all at once or in installments.
The CFPB found half of all accounts were eventually charged either an overdraft fee or an insufficient funds ("NSF") fee. Of those consumers that were charged a fee as a result of a returned request for payment, the average cost was $185 over the 18-month period.
Those numbers shed light on a second way that payday lending leads consumers into a cycle of debt. It is not just the case that the inability to cover a payday loan payment leads to a rollover fee. It is also the case that it can trigger an overdraft or an NSF fee. When it is the latter, the problem is doubly difficult: the consumer has paid a rollover fee and also an NSF.
Although the report's subject is online lending, the CFPB's ability to show the linkage between lenders and banks differentiates this work from most of the pre-existing research on this sector. The hard truth is that many lenders continued to present a request for payment even after the initial effort resulted in an NSF.
As it stands now, there is no downside for a lender to try to ping an account again and again. Nevermind that re-submissions for payment were not successful 70 percent of the time.
It is important that any reader of this paper comes away with the conclusion that banks who collaborate with online payday lenders in this fashion are complicit in the debt trap cycle. When credits clear once a day but the same debit can be turned down with an NSF multiple times within the same day, there is a systematic imbalance in place. Doing so aligns the interests of a bank with the online payday lender while simultaneously harming the consumer. Moreover, it is a short-term solution: in more than one-third of the instances when an online lender's request was returned with an NSF, the bank or credit union ended up closing the consumer's account thereafter - usually within the next three months.
At an average expense of $34, it is hard to imagine how an NSF fee presents a net tangible benefit to the consumer. Director Cordray emphasized how protecting consumers from repeat requests is not a policy that contradicts the idea that a debt should be repaid.
Of course," Richard Cordray said, "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. 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. We will consider this data further as we continue to prepare new regulations to address issues with small-dollar lending.
The new rule will address this problem by requiring lenders to gain a re-authorization from the consumer after two failed collection attempts.
But the devil is still in the details. In crafting a policy that truly helps consumers, is it even better to create a rule that will protect consumers over a longer period of time. Is re-authorization after two failed debits a sufficient impediment, or should the rule also say that there should be no more than three failed attempts allowed per year, as some advocates have proposed?
After the 2nd attempt, the harm imposed by the repeated debits (and perhaps even a subsequent account closure) exceeds the benefit for lenders. Indeed, one CEO from an online lender has already express his support for the idea behind this part of the proposed rule. Here is what Elevate's Ken Rees said in an American Banker editorial published earlier this month:
The CFPB rule could also specifically target abusive ACH processing. Most nonprime credit (especially from online lenders) is repaid via ACH. This is convenient and actually preferred by consumers as well as cost-effective for lenders, but if abused can cause excessive charges to customer bank accounts. The CFPB wants to ensure that consumers know their rights to rescind the ACH authorization and for lenders to limit the number of times they re-present a payment that has been returned for nonsufficient funds. This is a very simple, common sense change that will reduce consumer harm and prevent excessive bank charges.
Rees is unambiguous about the value of a clearly-expressed regulatory standards for his industry.
In the last days of the subprime mortgage lending boom, lenders had to compete ina race-to-the-bottom environment. Ultimately, that undermined everyone who touched the system. While the absence of rules against unauthorized repeat payment requests is different in its mechanics, in its spirit it resonates with lessons learned from the aftermath of the subprime crisis.