Richard Cordray, director of the Consumer Financial Protection Bureau, said the agency is working to clean up the abuses that are plaguing the electronic payments system.
To support his position, Cordray cited J.P. Morgan Chase research showing that 25% of payments for payday loans are returned.
"A number of factors may contribute to this astronomically high return rate for payday loans. But one that seems to be particularly common and troublesome is the practice of some online lenders repeatedly sending automatic debits to collect payments," Cordray said in a speech at The Clearing House in New York Thursday.
"We received a consumer complaint about a lender making nine separate collection attempts in a single day," he added. "When spread over a typical collection period, such practices could cost the consumer hundreds of dollars in bank fees and hundreds more in lender fees."
The CFPB said it received another complaint from a consumer whose account was closed with charges of $1,390 in bank fees. The individual had multiple loans from online payday lenders and 59 collection attempts were allegedly made through account debits over a two-month period.
"The financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are honoring the protections afforded consumers under the Electronic Fund Transfer Act," Cordray said. "But more fundamentally, consumers expect their own bank or credit union to be on their side. They trust them to hold on to their money, and banks and credit unions need to be better about doing just that."
Cordray said financial institutions frequently refuse to honor consumers' request to stop payments or close their accounts to prevent abuse.
He mentioned a consumer from Maryland who tried to cancel a local gym membership after the trial period but the gym still took automatic payments from her bank account.
"She contacted her bank and told them the charges were not authorized. But her bank denied her claim and the debits went on for several months, sending her account into the red and racking up more bank fees," Cordray said.
He added, "Despite repeated attempts to have the payments stopped, and despite assurances by a bank representative that they would be stopped, the debits and fees continued."
Over the past year, Cordray said the CFPB has seen some banks and credit unions put "good practices" in place to detect abuse before authorizing any charges but more needs to be done.
"We must shine a light on the murkier corners of electronic payment systems and related practices, and we must be vigilant about preserving consumer protections no matter how these approaches may evolve in the future," he said.
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