Payday Loans and the Hidden Cost of Bank Fees
While excessive interest rates and hidden fees have been top concerns in the payday lending industry for years, the burdensome banking penalties often associated with automatic loan repayments are now coming under heavy criticism.
A recently released report by the Consumer Financial Protection Bureau (CFPB) found that nearly half of 20,000 payday loan accounts had racked up an average of $185 in insufficient funds bank fees during an 18-month period. Among those accounts, nearly one-third of borrowers had a mandatory closure of their checking accounts for too many failed payment requests.
Payday Lenders Aggressively Abusing Authority
When a person is approved for a payday loan, they can opt to have the funds deposited immediately into their checking account. Repayments are arranged as automatic deductions from the same checking account on the borrower’s normal paydays. While the majority of payments are made on time, the 6 percent of borrowers who have experienced a failed request have discovered just how devastating even one transaction can be on their already fragile financial future.
When a withdrawal request is denied, lenders can continue to submit inquiries in an effort to collect the money. In the absence of federal laws governing the issue, each bank decides how many requests a merchant can submit per business day. Most of the large banks have set the limit at four. This policy allows lenders to break up the ACH deductions into smaller amounts in an effort to recover at least a portion of the payment. A withdrawal request that is even $1 more than the balance in the checking account can trigger an avalanche of overdraft and insufficient funds from the bank and the creditor.
In an article with the New York Times, CFPB Director Richard Cordray indicated that this behavior is an abuse of the lender’s “preferential access to people’s accounts.”
According to a separate study conducted by The Pew Charitable Trusts in 2014, 32 percent of online borrowers identified their payday loan payment as the cause for overdrawing their checking accounts. The survey also found that 22 percent of online borrowers ending up having their bank account closed due to problems with their payday loans.
Overdraft Fees Provide Big Profits to Banks
The shady practice of repeat withdrawal requests is a lucrative partnership for banks and lenders, who are able to pad their profits with penalties. Overdraft fees are a major moneymaker for banks, particularly in the post-recession economy and in the wake of laws limiting debit card and credit card fees. In 2015, consumers forked over almost $11 billion in overdraft charges. Most of the nation’s top consumer banks charge $35 for each failed transaction. Payday lenders can set their own price for insufficient funds, which is added to the loan.
Additionally, borrowers have little flexibility in changing their scheduled payment date or amount. Those who have made arrangements to only pay the interest must contact the lender at least three day prior to the payment date in order to payoff the full debt. The longer a repayment plan is stretched out, the more time a borrower has to run into another financial snag that causes them to fall behind on the loan. These aggressive collection tactics drive borrowers deeper into debt, giving them a slim chance of recovering. There is only a 30 percent success rate in lenders recapturing the full amount owed after the first request fails.
Few Laws Regulate Payday Lender Bank Fees
The payday loan industry must follow varying requirements set by the Federal Trade Commission and lawmakers in 38 states. However, despite a complete ban on payday loans in more than a dozen states, online lenders can still offer short-term credit to residents of those areas by electronically withdrawing payments from a bank account.
Customers can put a stop on pre-authorized withdrawals, but many are not aware this is an option or they do not notify the bank in time to prevent the payment request from processing. Other borrowers report that their banks continue to push through the transactions even after they have made repeated stop payment requests.
Along with additional regulations, the CFPB is currently considering ways to protect low-income consumers from being repeatedly dinged with hundreds of dollars in fees. One potential solution being considered is restricting creditors from making more than two requests to collect a payment. The account holder would then need to file a new authorization for payment with the bank before more transactions could be processed. Read more on the latest payday industry news at the Moneyblog on PersonalMoneyStore.com.