On April 20, 2016, the CFPB issued a new report entitled “Online Payday Loan Payments.” The Online Payday Loan Payments report is the third report the Bureau has published in connection with soon-to-be-issued rulemaking that will cover payday, auto title, and similar small-dollar, short-term loans.
The Bureau’s press release reads, “Previous reports have raised questions about the lending standards and loan structures that may contribute to the sustained use of these products.” This report focuses on the various ways online payday lenders attempt to collect payments from borrowers by debiting their bank accounts. More specifically, the report summarizes data on returned ACH payments made by consumers to repay online payday loans and, as Director Cordray puts it, the “collateral damage” to consumer bank accounts that follows failed payments. The Bureau claims that the study demonstrates how “bank penalty fees and account closures are a significant, hidden cost of online payday and payday installment loans.”
Last year the CFPB announced that it was considering a proposal that would require short-term lenders to provide consumers with written notice at least three business days before debiting the consumer’s account and would require new payment authorization after two consecutive failed debit attempts. The Bureau is concerned that payday lenders often make repeated attempts to debit money from consumer bank accounts, causing multiple overdraft fees when an account lacks sufficient funds. Further, the Bureau has expressed concern that consumers who are in the midst of financial difficulties may also face involuntary account closure if they carry a negative balance for an extended period or incur too many bank penalties.
According to the Bureau, the study found:
- Half of online borrowers are charged an average of $185 in bank penalties.
- One third of online borrowers hit with a bank penalty wind up losing their account.
- Repeated debit attempts typically fail to collect money from the consumer.
Of course, the study’s findings are far from conclusive. Critics have readily pointed out possible flaws in the Bureau’s methodology and have suggested that the CFPB’s press release overstates how severe and ubiquitous payment issues are throughout the industry.
One of the primary issues is that the data was culled from an 18-month period in 2011 and 2012 – four to five years ago. Critics cite to new NACHA guidelines and industry best practices that have changed the online lending business model and reformed ACH re-submission practices. It is reasonable to expect that payment return rates would be significantly lower if the CFPB were to analyze more recent online payday lending data. It is also worth noting that the report data examines the payment collection practices of online lenders – not storefront lenders who rely upon personal contact with borrowers to collect payments rather than automated re-submissions. And lastly, the Bureau’s headline finding that “half of online payday borrowers rack up an average of $185 in bank penalties” ignores the fact that half of online borrowers did not experience any returned payments. In fact, the report found that 94% of all ACH attempts were successful.
Observers speculate that the Bureau will likely use the report and its findings to support even more stringent restrictions on ACH re-submissions than those originally considered in the CFPB’s Outline of Proposals that were released in March of 2015. In its press release, the Bureau notes that it expects to issue a proposed rule later this spring.