Online Lenders' Use of ACH Can Lead to Cascading Fees, Account Closures for Consumers, CFPB Report Finds

Online lenders’ use of ACH networks to request payments can result in mounting fees and even account closure for borrowers with insufficient funds. That’s according to a new study from the CFPB, which took a look at the ACH behavior of lenders who, per the Bureau, make “online payday or other high-cost online loans with payments scheduled on a borrower’s payday.”

Half of online borrowers who avail themselves of these online payday-type loans end up with, on average, $185 in fees, the study notes. And, in one-third of these cases, the borrower loses the account entirely. (Although, on this second matter, the CFPB admits that there are other reasons besides this online lending debit scenario that may precipitate account closures.)

“After analyzing 18 months of data on more than 330 online lenders, we have found that borrowers face steep, hidden costs to their online loans in the form of unanticipated bank penalty fees,” said CFPB head, Richard Cordray.

Here is the scenario at the heart of the report. Online lenders often use ACH networks to deposit funds directly into borrower’s accounts. And then, when, payment is due, those lenders use the very same networks to withdraw payments. If the borrower in question has insufficient funds in his or her account, the borrower’s credit union or bank may charge an insufficient funds fee (NSF) or it may fulfill the request and charge an overdraft fee. During the time period covered in the report, the median fee in both instances was about $34.

Whether that financial institution opts to deny the payment or process it despite insufficient funds, the transaction starts with a fee.

The Bureau report also found that in many instances, the lender will attempt to debit the borrowers account again and again, in smaller increments, with the hopes that it can withdraw partial payments. There is no financial or legal disincentive for lenders to debit that borrower’s account repeatedly. But for the borrower, the fees mount and, in some cases, that borrower’s financial institution will eventually close the account.

According to Cordray, this kind of behavior should be considered abuse.

“Of course, lenders that are owed money are entitled to get paid back,” Cordray said, with regards to the study’s findings. “But we do not want lenders to be abusing their preferential access to people’s accounts.  Borrowers should not have to bear the unexpected burdens of being hit repeatedly with steep, hidden penalty fees that are tacked on to the costs of their existing loans.  Yet today’s report shows that this is just what is happening to many consumers.  We will consider this data further as we continue to prepare new regulations to address issues with small-dollar lending.”

Here are several takeaways from the report:

• Half of online borrowers are charged an average of $185 in bank penalties: One half of online borrowers have at least one debit attempt that overdrafts or fails. These borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts.
• One third of online borrowers hit with a bank penalty wind up losing their account: A bank account may be closed by the depository institution for reasons such as having a negative balance for an extended period of time or racking up too many penalty fees. Over the 18-month period covered by the data, 36 percent of accounts with a failed debit attempt from an online lender ended up being closed by the depository institution. This happened usually within 90 days of the first non-sufficient funds transaction.
• Repeated debit attempts typically fail to collect money from the consumer: After a failed debit attempt, three quarters of the time online lenders will make an additional attempt. Seventy percent of second payment requests to the same consumer’s account fail. Seventy-three percent of third payment requests fail. And, each repeated attempt after that is even less likely to succeed.

In 2015, the Bureau announced plans to prohibit high-cost online lenders from making more than two unsuccessful attempts in succession to debit a borrower’s checking or savings account. The Bureau also suggested that a new rule on the matter could be out later this spring.

The insideARM perspective

The actions taken by these online lenders are not illegal and make sense, from a strict financial perspective; but because the consequences for some borrowers have been material, it is not hard to imagine the CFPB considering this type of action to be abusive. This report and the comments the Bureau has made surrounding this are consonant with long-standing Bureau positions and actions – and, what’s more, serve as a general reminder to the collections industry to think through corporate policy and actions and assess whether certain actions could result in what the Bureau would consider a UDAAP violation.

More directly, however, this is a solid reminder for agencies who work with online lenders to vet the policies and procedures of those lenders. Why? Because we’ve seen plenty of collections agencies dinged by regulators for the behaviors and bad actions of the lenders for whom they work. And here is a great example of a potential pitfall. Remember to work closely with your online lender clients and make sure they are not handling consumer accounts in this way to save yourself from potential regulatory trouble.