"Online Payday Loan Payments," a new report published today by the CFPB, shows that consumers who use online payday loans pay additional fees to their banks. Its findings underscore why the CFBP's proposed rule covering small-dollar lending deserves support.
The CFPB culled through data from single-repayment and installment loans made by 330 online payday lenders over a period of 18 months.
The CFPB found banks charged either an overdraft fee or an insufficient funds ("NSF") fee to approximately half of the accounts. 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 months.
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, lenders (and their payment processor partners) do not take any risks when they "robo-debit" an account. Nevermind that re-submissions for payment were not successful 70 percent of the time.
Any reader of this paper must come 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 payment request made by an online lender's resulted in an NSF fee, the bank or credit union ended up closing the consumer's account after that - 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. With an overdraft, the consumer still gets the benefit of having a payment fulfilled. The NSF charge provides nothing.
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.