Online And Storefront Payday Lenders Are More Alike Than Different by Consumer Financial Protection Bureau
Payday lenders that make loans over the internet often use the Automated Clearing House (ACH) network to deposit the loan proceeds directly into borrowers’ checking accounts. They then collect payment by submitting a payment request to the borrower’s depository institution through the same system. If a borrower’s account lacks sufficient available funds when the lender submits an ACH payment request, the borrower’s depository institution may or may not fulfill the request. If the depository institution fulfills the payment request, it will likely charge the borrower an overdraft fee. Alternatively, the depository institution may return the payment request for insufficient funds. We refer to this as a “failed payment request.” In this case, the borrower will likely be charged a non-sufficient funds (NSF) fee by the depository institution and may be charged a late fee, a returned payment fee, or both by the lender. The typical fee for both overdraft and NSF was $34 in 2012, the period covered by most of the data reported here.
When an ACH payment request results in a failed payment, the lender may re-present the request. Payday lenders may use various practices to attempt to maximize the likelihood that presenting the payment request again will result in obtaining payment from a borrower’s account, including varying the timing or amount of each payment request. We classify any subsequent payment request after a failed payment request as a “re-presentment,” apart from successive failed requests on the same day.
In this report, we use checking account data from several large depository institutions to analyze ACH payment requests by a number of lenders that make (or made) online payday or other high-cost online loans with payments scheduled on a borrower’s payday. For convenience, we refer to the loans as “payday loans,” although it is likely that many of the loans are not standard, single-payment payday loans.
Online And Storefront Payday Lenders – Key Findings Of This Report Include:
- During the 18 months we observe account activity, accounts with one or more loans from at least one of the identified online lenders make payments totaling on average $2,164. The data do not permit us to distinguish which portion of those payments went to cover fees or interest and which portion went to repay principal. Nor can we identify the number of loans the average consumer took out during this period from these payday lenders. These same accounts are charged an average of $92 in overdraft and NSF fees by their institution on payment requests from online lenders during the 18 months.
- Half of all accounts have at least one payment request that results in overdraft or failure due to NSF during the 18 month observation period. These accounts are charged an average of $185 in overdraft and NSF fees by their institution on attempted payment requests from online payday lenders during the 18 months. We identify several different types of payment requests to determine which requests result in fees. Of the average of $185 in fees, $97 on average are charged on payment requests that are not preceded by a failed payment request, $50 on average are charged because lenders re-present a payment request after a prior request has failed, and $39 on average are charged because a lender submits multiple payment requests on the same day.2
- After a failed ACH payment request by an online lender, subsequent payment requests to the same consumer’s account are unlikely to succeed. If not preceded by a failed payment request, only 6% of payment requests fail. After a failed payment request, however, 70% of initial re-presentments fail, and subsequent re-presentments are even less likely to succeed.
- Of the 94% of initial payment requests that succeed, 7% succeed only because the borrower’s depository institution covers the payment as an overdraft. If an initial payment request fails and the lender makes a subsequent attempt, only 30% of the initial re-presentments succeed, and about a third of those succeed because they are paid as overdrafts. Subsequent re-presentments show a similar pattern of succeeding only because of overdraft.
- Many online payday lenders submit multiple payment requests on the same day. Thirty-four percent of online payday payment requests occur on the same day as another request by the same lender. When multiple payment requests are submitted to a single account on the same day by an online lender, the payment requests usually all succeed (76%) or all fail (21%). Only 3% of payment requests that occur on a day with multiple requests are on days when at least one payment fails and another succeeds.
- Accounts of borrowers who use loans from online payday lenders are more likely to be closed by the end of the sample period than accounts generally (23% versus 6%, respectively). Accounts with any online payday loan payment request that fails are particularly likely to be closed, with 42% of such accounts closing by the end of the sample period.
The analysis presented here uses data on consumer checking accounts obtained from several large depository institutions.3 The data used in this analysis were previously used for the Bureau’s research into deposit advance products; all of the depositories included in the data collection offered deposit advance products during the sample period, which spanned 18 months in 2011 and 2012.
The Bureau received two samples from each depository institution. The first was drawn from checking accounts that were eligible to use the deposit advance product at some point during the sampling period but had not taken a deposit advance. The second sample was drawn from accounts that were eligible and had used the deposit advance product during the sample period; these accounts were sampled at a higher rate. We weight all of the results throughout the report accordingly. Note that we do not have data on accounts that were never eligible for deposit advance products during the sample period, which may limit the generalizability of the results to other populations, such as checking account customers who do not receive their income via direct deposit. However, customers are typically required to state their income when applying for online payday loans. Customers with direct deposit are likely to have regular income, whereas customers without direct deposit may be less likely to have regular income. Thus, customers without direct deposit may be less likely to qualify for an online payday loan as they may be unable to state income that meets the lender’s requirements.
The datasets used for this analysis include all of the de-identified transactions of a checking account during the sample period. For each transaction, the depository institution provided the amount of the transaction, the type of transaction, such as a debit from a debit card or a credit from a personal check, and whether the transaction was paid normally, was paid as an overdraft, or was refused because of insufficient funds. The depository institution also identified if the transaction had a depository assessed fee associated with it due to overdraft or NSF. Depository institutions typically have a maximum number of transactions in a day that are allowed to incur overdraft and NSF fees. Transactions that result in overdraft or NSF can still occur once the maximum number that are allowed to incur fees is reached; however, transactions that overdraft or fail due to NSF beyond the maximum number would not incur fees from the depository institution. A subset of the depositories provided information identifying the merchant initiating electronic transactions, including ACH transactions, and the data used in this analysis is limited to that subset of depositories. The data do not include specifics relating to what was purchased. Any personally identifiable information, such as account holder name or social security number, was removed from the data before Bureau staff began this analysis.
To identify online payday lenders in the data, we examined each merchant description in the data with 50 or more ACH debit transactions, a total of 14,099 merchant descriptors. We identified possible online lenders based on the merchant descriptions, and used online search engines to determine whether the merchant was, in fact, an online lender making payday or similar high-cost loans. For this analysis, online lenders include companies providing high-cost, short-term loans and operating strictly over the internet or by phone. In addition to lenders making traditional payday loans with a single balloon payment, we include payday lenders making high-cost installment loans with various payment structures, typically with payments timed to coincide with a borrower’s payday. While a small number of online lenders offer loans secured by an auto title, the overwhelming majority of lenders included in this analysis only offer unsecured loans. Loans secured by an auto title typically require a borrower to visit a physical location, and thus, lenders making such loans are less prevalent in the online market. Due to our limited ability to identify certain types of transactions, lenders known to have storefronts, even if they also make loans online, are excluded from this analysis.5 Of the 14,099 merchants we reviewed, we classified 332 as online lenders.6 We identified 19,685 accounts in the dataset with payment requests from at least one of these payday lenders.
See full report below.