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From Banking and Finance Law Daily, April 20, 2016

CFPB: Lender debit attempts cost online payday borrowers

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published a report on the costs to borrowers when online payday lenders make repeated attempts to debit their checking accounts. The bureau found that these repeated attempts “add a steep, hidden cost” to online payday loans. Half of borrowers accrue an average of $185 in bank penalties because at least one debit attempt overdrafts or fails, and one-third of those borrowers end up having their account closed involuntarily, according to the report. The bureau also found that despite the high cost to consumers, lenders’ repeated debit attempts typically fail to collect payments.

Last year the CFPB announced it was considering a proposal that would prohibit payday lenders and similar lenders from making more than two unsuccessful attempts in succession on a borrower’s checking or savings account. The bureau said it is expecting to issue a proposed rule later this spring.

Online payday process. In prepared remarks for a research report press call, CFPB Director Richard Cordray explained the process used by online payday lenders to collect payments from borrowers. Online lenders often use an automated network to deposit the loan amount into a borrower’s bank or credit union account and collect their payments through those same automated networks by submitting payment requests. “This easy means of collection means they have considerable power over a consumer’s bank account,” Cordray said.

Traditional payday loans require a one-time payment within a relatively short period of time after the consumer obtains the loan, but online payday loans take different forms. The loans may require a single payment, a series of interest-only payments with a final balloon payment covering the entire principal amount, or installments with each payment scheduled to coincide with the consumer’s payday.

If there is not enough money in a consumer’s checking account to cover a payment, the consumer will incur bank penalties. The bank or credit union can choose to make the payment on the consumer’s behalf or deny the request. Either way, this often means additional penalty charges will be imposed. During the time period covered in the report, the median fee in both instances was about $34. These fees are in addition to any that the lender might charge when the payment does not go through.

“Of course, lenders that are owed money are entitled to get paid back,” Cordray said. “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.”

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