CFPB Finds Half of Online Payday Borrowers Rack Up an Average of $185 in Bank Penalties
The Consumer Finance Protection Bureau (CFPB), issued a new report that examines online payday loan payments.
“The report found that online lenders’ attempts to debit payments from a consumer’s checking account add a steep hidden cost to online payday loans. Half of all accounts have at least one payment request that results in overdraft or failure due to non-sufficient funds during the 18 month observation period. These accounts are charged an average of $185 in overdraft and non-sufficient funds fees by their institution on attempted payment requests from online lenders during the 18 months. And one third of those borrowers who get hit with a bank penalty wind up having their account closed involuntarily. The report also found that despite this high cost to consumers, lenders’ repeated debit attempts typically fail to collect payments.” – Desmond Brown
Read the report to learn more:
Key findings of this report include:
- During the 18 months we observe account activity, accounts with one or more loans from at least one of the identified online lenders make payments totaling on average $2,164. The data do not permit us to distinguish which portion of those payments went to cover fees or interest and which portion went to repay principal. Nor can we identify the number of loans the average consumer took out during this period from these lenders. These same accounts are charged an average of $92 in overdraft and NSF fees by their institution on payment requests from online lenders during the 18 months.
- Half of all accounts have at least one payment request that results in overdraft or failure due to NSF during the 18 month observation period. These accounts are charged an average of $185 in overdraft and NSF fees by their institution on attempted payment requests from online lenders during the 18 months. We identify several different types of payment requests to determine which requests result in fees. Of the average of $185 in fees, $97 on average are charged on payment requests that are not preceded by a failed payment request, $50 on average are charged because lenders re-present a payment request after a prior request has failed, and $39 on average are charged because a lender submits multiple payment requests on the same day.
- After a failed ACH payment request by an online lender, subsequent payment requests to the same consumer’s account are unlikely to succeed. If not preceded by a failed payment request, only 6% of payment requests fail. After a failed payment request, however, 70% of initial re-presentments fail, and subsequent re-presentments are even less likely to succeed.
- Of the 94% of initial payment requests that succeed, 7% succeed only because the borrower’s depository institution covers the payment as an overdraft. If an initial payment request fails and the lender makes a subsequent attempt, only 30% of the initial re-presentments succeed, and about a third of those succeed because they are paid as overdrafts. Subsequent re-presentments show a similar pattern of succeeding only because of overdraft.
- Many online lenders submit multiple payment requests on the same day. Thirty-four percent of online payday payment requests occur on the same day as another request by the same lender. When multiple payment requests are submitted to a single account on the same day by an online lender, the payment requests usually all succeed (76%) or all fail (21%). Only 3% of payment requests that occur on a day with multiple requests are on days when at least one payment fails and another succeeds.
- Accounts of borrowers who use loans from online lenders are more likely to be closed by the end of the sample period than accounts generally (23% versus 6%, respectively). Accounts with any online payday loan payment request that fails are particularly likely to be closed, with 42% of such accounts closing by the end of the sample period.
Office of Financial Empowerment
Consumer Financial Protection Bureau
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