Banking & Credit

CFPB Research Finds That Payday Loans Harm Consumers, Trigger Overdraft Fees

Consumer Federation of America calls For New Protections To Protect Borrowers’ Bank Accounts As Part Of Forthcoming Rule On Payday Loans

Washington D.C.—Today, the Consumer Financial Protection Bureau (CFPB) released a new report documenting the harm caused when payday lenders use direct access to a borrowers’ bank account to collect payments-including frequent, high overdraft fees and even account closure.  While the report uses data related to payday loan transactions conducted online, the findings suggest the need for strong protections for all payday loans.

Like payday loans made by storefront lenders, online payday loans carry high interest rates, pull payments directly from a consumer’s bank account and are made with little consideration of a borrower’s ability to repay.

“These findings reinforce what consumer, civil rights and faith organizations across the country have said time and time again,” said Tom Feltner, Director of Financial Services at Consumer Federation of America.  “Payday loans result in long-term financial hardship and pile on overdraft and other fees that put borrowers’ financial security at risk.”

The CFPB report found that over an 18-month period:

  • Half of all deposit accounts that made at least one payment to an online payday lender had at least one overdraft triggered by an attempt to collect a payday loan payment.
  • When accounts had at least one overdraft triggered by an online lender, accountholders paid an average of $185 in overdraft fees.
  • Nearly half of the overdraft fees incurred were the result of multiple, repeated collection attempts.
  • Multiple collection attempts did not increase the likelihood of successful repayment and many of the payments that are collected are only collected because the accountholder incurred an overdraft.
  • Accounts from borrowers with online payday loans were more likely to be closed at the end of the study period than those that did not use payday loans (23 percent versus 6 percent), and far more likely (42 percent) if multiple collection attempts were unsuccessful.

New protections under consideration should protect borrowers from overdraft fees and other financial hardships

In March 2015, the CFPB released a draft proposal to protect consumers from abusive payday and auto title loans.

Among the provisions within the proposal under consideration are a requirement to fully consider a borrower’s income and expenses before making a loan, rather than relying on bank account access to collect payments.  The Bureau is also considering a limit on collection attempts that would protect consumers’ bank accounts.

“The CFPB’s research is clear—direct access to a borrowers’ bank account puts consumers’ checking accounts at risk.  We need strong and immediate action to require lenders’ to fully consider a borrowers’ ability to repay a loan without re-borrowing, overdraft fees or other financial hardship,” said Feltner.

Contact: Tom Feltner, 202-618-0310

The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.