By TED CARTER
The U.S. Consumer Financial Protection Bureau is expected this spring to propose limits on the attempts an online payday lender can make to withdraw money from a borrower’s bank account.
The rulemaking follows an 18-month analysis of online payday lending and its costs to borrowers. In addition to large fees for overdrafts and charges for non-sufficient funds, repeated failed attempts by lenders to access borrower accounts often result in the banks closing the accounts, leaving the borrower unbanked and without access to financial services, the analysis found.
Consequently, the Consumer Financial Protection Bureau is considering a proposal to limit payday lenders, whether online or storefront, as well as similar lenders to making two unsuccessful attempts in succession on a borrower’s checking or savings account.
Attempts by online lenders to debit payments from a consumer’s checking account add a steep, hidden cost to online payday loans, the Consumer Financial Protection Bureau, or CFPB, said Tuesday in announcing a phone-in press conference on the issue with Richard Cordray, the Bureau’s director.
Half of online borrowers rack up an average of $185 in bank penalties because at least one debit attempt overdrafts or fails, the CFPB said. And 36 percent of those borrowers who get hit with a bank penalty wind up having their account closed involuntarily, the Bureau added.
“Getting booted from the banking system can have far-reaching repercussions for consumers, leading to a downward spiral that costs them even more money,” Cordray said in his press call.
“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.”
In the end, neither the lender nor the bank are likely to gain any money, the analysis found. “Despite this high cost to consumers, lenders’ repeated debit attempts typically fail to collect payments,” the CFPB said.
The study, Cordray said, found that 70 percent of second payment requests fail to collect any money and later attempts are even less likely to succeed.
“Bank penalty fees and account closures are a significant and hidden cost to these products,” Cordray said. “We are carefully considering this information as we continue to prepare new regulations in this market.”
One likely area the CFPB will examine is the considerable power online lenders and the Automated Clearing House, or ACH, payment systems they use have over a consumer’s bank account.
Cordray noted that while traditional payday loans require a one-time payment within a relatively short period of time after the borrower gets the loan, online payday loans take different forms. Some require a single payment. Some require a series of interest-only payments and a final balloon payment covering the entire principal amount. Some are repaid in installments with each payment scheduled to coincide with the consumer’s payday.
If the consumer does not have enough money in her account, then her bank or credit union can choose to make the payment on her behalf or it can choose to deny the request. “Either way, this often means additional penalty charges will be imposed,” Cordray said. The bank or credit union can either make the payment and impose an overdraft charge or refuse the payment and assess a non-sufficient funds charge.”
During the time period covered in the CFPB analysis, the median fee in both instances was about $34. If the bank or credit union declines the payment, the charge is levied in addition to any penalties the payday lender itself may charge for the failed payment, Cordray said.
The analysis took in 18 months of data on more than 330 online lenders.
Mississippi requires online lenders to be licensed by the state. If unlicensed, the loans they make in the state are invalid and the borrower can’t be forced to repay them, said Stephen Shelver, general counsel for the Mississippi Department of Banking and Consumer Finance.
The problem is that the bank or credit union has no way of knowing whether an online lender has a Mississippi license, according to Shelver.
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