Online Payday Lenders Are Costing Borrowers Hundreds in Bank Penalties

Payday lenders who operate online stores aren’t just bilking millions from consumers through their exorbitant interest rates and fees. They are also causing their customers to rack up an average of $185 per person in bank penalties, says a new report released by the Consumer Financial Protection Bureau (CFPB) this week. It outlines how these lenders, through repeated debit attempts, add steep and hidden costs to their borrowers. Worse, they are often punished after too many penalties by their financial institution taking action to close down their accounts involuntarily. Yet despite the hundreds of dollars in penalties customers rack up because of these repeated debit attempts, lenders typically fail to even collect the initial payment they were seeking.

“Taking out an online payday loan can result in collateral damage to a consumer’s bank account,” said CFPB Director Richard Cordray in a statement. “Bank penalty fees and account closures are a significant and hidden cost to these products. We are carefully considering this information as we continue to prepare new regulations in this market.”

Over the past few weeks, we’ve highlighted many stories of Latino borrowers who have fallen victim to the shady practices of payday lenders. Many of the people we have featured, however, have received their loans from brick-and-mortar outlets. This week’s report highlights the increasing number of borrowers who have taken to the Internet to find the extra cash they need.

Between 2011 and 2012, the CFPB analyzed online payday and online installment loans by more than 330 lenders across the country. The report specifically highlights the methods online lenders employ to recoup their loan by debiting their clients’ checking accounts, which they get access to when the borrower takes out the loan.

Here’s what the study found: Lenders will submit a payment request to the borrower’s financial institution. If a debit attempt is declined, lenders will often make repeated attempts against the account in question. Usually, the bank or credit union will pay the debit and then pass on a penalty fee to the customer for insufficient funds. These fees average around $34. If the debit attempt is rejected, payday lenders often charge the customer a late fee, a returned payment fee, or sometimes both. This usually results in negative account balances, which then leads to involuntary account closures.

The report further bolsters the need for the CFPB to reign in these lenders. That’s why we support a rule the agency is considering that would severely curb payday lending practices and put much-needed protections for consumers in place.

Join the fight against payday lending by adding your name to our petition to CFPB Director Cordray letting him know you support strong rule that protects consumers and curbs underhanded lending practices.