On April 20, 2016, the Consumer Financial Protection Bureau ("CFPB")
issued a new report that takes issue with the way so called “payday
lenders” handle automated bank debits to collect borrower payments.
The investigation concludes that attempts from lenders to debit consumer
accounts multiple times resulted in expensive and unnecessary fees being
levied against borrowers.
The press release stated, “previous reports have raised questions
about the lending standards and loan structures that may contribute to
the sustained use of these products.” Payday loans are sold as a
temporary loan that a consumer can use to bridge a shortfall of cash flow.
The loans are typically high-cost products that offer quick access to
money. Full payment is usually due on the borrower’s next payday,
although some lenders may offer installment loans or longer-term loans
that may or may not require an automated debit repayment plan.
The report summarizes data on ACH payments made by consumers to repay online
payday loans and, as Director Cordray puts it, the “collateral damage”
caused to consumer bank accounts that follows failed payments. The CFPB
claims that the study demonstrates how “bank penalty fees and account
closures are becoming a significant, hidden cost of online payday and
short-term installment loans.”
Last year, the CFPB announced that it was considering a proposal, which
would require short-term lenders to provide consumers with written notice
at least three business days before debiting the user’s account,
and would require new payment authorization after two consecutive failed
charge attempts. The CFPB 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 CFPB has expressed concern that consumers who are in the midst of
financial difficulties may also face the possibility of involuntary account
closure if they carry a negative balance for an extended period or incur
too many bank penalties.
According to the CFPB, the study found:
1. Half of online borrowers are charged an average of $185 in bank penalties.
2. One-third of online borrowers hit with a bank penalty end up losing
3. 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 methodology and have suggested
that the press release overstates the severity of payment issues throughout
One of the primary issues with the report is that the data was extracted
during an 18-month period between 2011 and 2012 – four to five years
ago. Critics cite how new NACHA guidelines and industry best practices
have changed the online lending business model and reformed ACH re-submission
Those criticizing the report have noted that it is reasonable to expect
that return payment 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 on personal contact with
borrowers to collect payments rather than automated re-submissions. Lastly,
the CFPB’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 CFPB will likely use the report and its findings
to support even more stringent restrictions on ACH re-submissions than
those initially considered in the CFPB’s Outline of Proposals released
in March of 2015. In its press release, the CFPB notes that it expects
to issue a proposed rule later this spring.
If you have any questions you can
contact Jaspreet Kaur or call our main office at (949) 298-8050.