Many consumers who took out online payday loans are now facing an unexpected, additional expense – fees charged by their financial institution when a lender's attempt to collect loan repayment fails, the CFPB said in a new report.
Half of online borrowers received an average of $185 in bank penalties because at least one debit attempt failed, the agency found in an 18-month study of 330 lenders that made loans in 2011 and 2012.
Borrowers may be required to pay an overdraft fee, which the CFPB said typically totaled $34 at banks in 2012. However, a recent report from Moebs $ervices showed the average overdraft fee at credit unions now stands at $29, compared to $30 at banks.
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In addition, one-third of borrowers ended up having their bank accounts involuntarily closed.
The CFPB is in the process of developing rules governing payday lending. In addition, the agency has been encouraging banks and credit unions to offer consumers accounts that do not overdraft.
"Taking out an online payday loan can result in collateral damage to a consumer's bank account," CFPB Director Richard Cordray said when the agency released the report. "Bank penalty fees and account closures are a significant and hidden cost to these products."
The CFPB reported online lenders often use an automated system to deposit loan money into a borrower's account and use the same system to request payment on the loan. The lender may make several attempts to collect on the loan and if the account does not have sufficient funds, the borrower can incur repeated fees, the agency reported.
The CFPB reported 70% of the second payment requests failed and 73% of the third requests were unsuccessful.
"We believe that many people who live paycheck to paycheck need access to credit that can help them manage their financial affairs," Cordray said. "But we also believe that consumers deserve to have access to responsible credit that helps them rather than harms them."
Credit union trade associations reacted to the report by emphasizing their desire for the CFPB to leave credit unions out of its payday lending rulemaking efforts.
"NAFCU has been actively engaged with the CFPB on the issue of payday lending," NAFCU President/CEO Dan Berger said. "We appreciate that in his recent testimony before the House Financial Services Committee and the Senate Banking Committee, Director Cordray recognized that the credit union payday alternative loans are a 'good product.' We hope that, going forward, the CFPB exercises its exemption authority to exclude credit unions from any payday lending rulemaking from the bureau. We want to ensure credit unions are not lumped into rules designed to control bad actors."
CUNA President/CEO Jim Nussle commented, "The CFPB's report today highlights the concerns credit unions have been voicing to the bureau about when consumers are forced to turn to inferior products such as less, or nonregulated, online payday lenders. As opposed to offshore, or online payday lenders, credit unions know their members and work with them to navigate through difficult financial situations. It is essential that CFPB rulemakings do not stand in the way of credit unions' ability to continue to offer the diverse products and services that consumers want and need such as free checking accounts, so that consumers can turn to their local credit union – not predatory lenders – during times of distress."
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