Consumer bureau study: Online loans can lead to bank woes

Many Americans are facing steep bank fees and even losing their accounts after signing up for online payday loans, according to a new government report.

The Consumer Financial Protection Bureau reported Wednesday that half of all Americans that have taken out an online loan have ended up paying an average of $185 in bank penalties.


The agency, which is considering new rules on the payday lending industry, identified several potential issues that can arise when online lenders have the authority to debit bank accounts of borrowers.

When borrowers do not have enough money in their accounts, they can end up facing a host of overdraft fees or failed transactions. And when borrowers do get hit with a bank penalty, the CFPB found that a third end up losing their accounts thanks to the failed transactions or negative account balances that are the end result.

“Taking out an online payday loan can result in collateral damage to a consumer’s bank account,” said CFPB Director Richard Cordray. “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.”

The fees consumers end up paying their banks for failed debits does not include fees that the lender may end up assessing as well. For a failed debit transaction, the CFPB found that lenders could end up assessing their own fees on top of that.

Furthermore, the CFPB found that lenders would often repeatedly try to tap a borrower’s bank account after an initial failed transaction, tacking on new fees each time. Lenders also will try to break up payment requests into smaller, separate amounts, to try and maximize their odds of successfully debiting the account.

However, the CFPB found in its report that if a borrower has trouble paying back a lender, repeated attempts are unlikely to be successful. After a first failed transaction, the CFPB found that 70 percent of borrowers still cannot make the payment after a second attempt.

The study spanned 18 months, where the CFPB scoured financial data to carve out 330 online lenders. All told, the CFPB identified nearly 20,000 accounts that saw payment requests from at least one of those lenders.