Consumers who turn to online lenders when they need extra cash often miss payments and rack up hundreds of dollars in bank fees, according to a report issued Tuesday by the Consumer Financial Protection Bureau.
In its report, released ahead of proposed new rules governing the payday and online lending industries, the federal consumer watchdog found that half of borrowers who use online lenders don't have enough money in their bank accounts to cover a scheduled payment.
That's a problem because lenders often have permission to pull payments directly from a borrower's bank account. And when there's not enough money to cover a payment, banks can charge consumers either an overdraft fee or a non-sufficient funds fee.
Those fees added up to $185 on average over an 18-month period for consumers who missed one or more payments, according to the report. That's on top of late fees or other charges the lenders may add on.
"We have found that borrowers face steep, hidden costs to their online loans in the form of unanticipated bank penalty fees," CFPB Director Richard Cordray told reporters on a conference call Tuesday.
The report comes as the bureau, facing bipartisan opposition in Congress, is trying to move forward with new rules for companies that offer credit to consumers in small amounts, including through payday loans, which typically amount to just a few hundred dollars.
A bill co-sponsored by Rep. Debbie Wasserman Schultz, a powerful Florida Democrat and chairwoman of the Democratic National Committee, would prevent the bureau from making any rules governing the payday lending industry for at least two years.
Lending industry trade groups also have pushed back against the proposed rules, saying they would cut off consumers' access to credit and don't take into account recent changes in industry practices.
The bureau's proposal, an updated version of which is expected sometime this spring, is likely to call for lenders to do more to ensure that borrowers can afford to pay back their loans and to stop practices that lead to costly bank charges.
The initial proposal calls for requiring lenders to notify consumers at least three days before drawing payments from their bank accounts. It also would prevent lenders from making more than two attempts to collect a payment.
The report found that lenders often make multiple attempts to pull payments from a borrower's account after an initial payment is rejected.
For instance, a lender might try to collect a single payment of $300. If the payment fails because the borrower doesn't have enough in his or her account, Corday said the lender might make three attempts to collect $100 — hoping that the borrower has at least $100 or $200 in the account.
Those additional payment attempts can bounce too, leading to additional fees.
Lisa McGreevy, chief executive of trade group Online Lenders Alliance, said that practice — called splitting — may have been common in years past but is now prohibited by the NACHA, a banking industry association that oversees the automated bank debit system.
What's more, she said, rules from NACHA that took effect last year discourage repeated withdrawal requests from lenders by threatening to cut them from the bank debit system. The CFPB's study looked at transactions from an 18-month period in 2011 and 2012.
The lending trade group in August sent a letter to the CFPB, saying those new rules would address the bureau's concerns.
What's not clear from the bureau's report is which lenders or type of lenders are most responsible for repeat payment attempts and resulting fees.
The bureau looked at transaction information from the accounts of about 20,000 consumers who borrowed money from one of more than 300 online lenders.
That includes payday lenders, which expect to be paid back in a lump sum after a few weeks, and so-called installment lenders, which make larger loans, often for thousands of dollars, that are paid back over months or years.
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