Online payday loans a path to hefty bank fees, account closures

Marketed as a means of bridging a cash-flow shortage between paychecks or other income, payday loans are largely understood as a high-cost means of getting quick cash. Less understood, perhaps, is that the loans offer lenders access to borrowers' bank accounts, where havoc can be wreaked.

A report out Wednesday by the Consumer Financial Protection Bureau (CFPB) finds consumers pay more than just high interest rates when taking out an online payday loan.

Online payday lenders deposit the funds electronically in consumer bank accounts, and retrieve loan payments the same way. As a result, half of consumers who obtained a loan online are penalized by their banks because at least one debit attempt overdrafts or fails, while a third of those getting hit with a bank penalty wind up having their account closed involuntarily, according to the CFPB, which analyzed data from an 18-month period in 2011 and 2012 involving 330 lenders.

If a payment request fails, lenders often follow up by making repeated attempts to extract payments from the account, with each potentially resulting in more fees, the regulatory agency found. Other lenders split a single payment into multiple smaller requests the same day, hoping to collect at least some of the money.

"They can do this, for example, by making three $100 attempts on a day the consumer is due to repay $300. In one extreme case, we saw a lender that made 11 payment requests on an account in a single day," CFPB Director Richard Cordray said in prepared remarks, pointing what he called the "hidden cost" of payday loans.

Half of online payday loan borrowers end up paying $185 in bank fees alone, according to the bureau, which is working on rules expected to be proposed later in the spring.

Despite the high cost to consumers, lenders' repeated debit attempts typically fail to collect payments, the bureau's study found.

"The findings suggest the need for strong protections for all payday loans," the Consumer Federation of America said in a statement. "Like payday loans made by storefront lenders, online payday loans carry high interest rates, pull payments directly from a consumer's bank account and are made with little consideration of a borrower's ability to repay."

In a previous report, the CFPB found that four of five payday loans are rolled over or renewed within 14 days, and that a majority of all payday loans are made to borrowers who renew their loans so many times they pay more in fees than the amount of money they originally borrowed.

In March 2015, the CFPB released a draft proposal to protect consumers from payday and auto title loans, which are secured by a person's vehicle. One provision being considered is a requirement to fully consider a borrower's income and expenses before making a loan, rather than relying on bank account access to collect payment. The agency is also mulling a limit on collection attempts that could be made via consumers' bank accounts.

A trade group representing payday lenders opposes the moves being contemplated.

"The changes imposed by the looming CFPB proposal would force many operators to shut down, leaving consumers scrambling for other forms of credit that are not readily available," Dennis Shaul, chief executive of the Community Financial Services Association of America, wrote earlier this month.