Consumers who use online payday lenders may be taken advantage of twice: first, by the lenders’ triple-digit interest rates that flout state caps, then with fees tacked on by the borrowers’ own banks.
A new report published last week by the Pew Charitable Trusts states that while consumers often turn to payday lenders in order to avoid writing bad checks or getting hit with overdraft fees, in many cases customers wind up paying overdraft and payday loan fees. “Although payday loans are often presented as an alternative to overdrafts, most payday borrowers end up paying fees for both,” the report states. The payday lenders make out, the banks make out — and the losers are their customers.
The fees can add up especially quickly and snowball when banks refuse to block payday lenders from accessing borrowers’ accounts — which can then trigger overdraft fees from the bank.
According to the New York Times, a growing number of payday lenders set up shop in states with looser lending regulations, or even overseas in places like Malta and the Bahamas, to get around state usury laws. A New York City advocacy group for low-income and minority residents filed a lawsuit against JPMorgan Chase Bank last fall for what it says are illegal and exploitative tactics that have cost the two named plaintiffs thousands of dollars in penalty fees it contends they shouldn’t have had to pay. The Neighborhood Economic Development Advocacy Project (NEDAP), which brought the suit against Chase on plaintiffs’ behalf, says banks shouldn’t be willing to let online payday lenders take money out of customer accounts in states where such loans are illegal.
A representative of the American Bankers Association told the New York Times that banks are “not in a position to monitor customer accounts to see where their payments are going.”
Last month, four senators introduced a bill in Congress that would require payday lenders to comply with the laws where borrowers live rather than where the lender is located. “Over twenty states have passed legislation to stop abusive lending, but these efforts have been challenged by the growing online presence of payday lenders,” Jeff Merkley (D-OR) says in a statement about the bill.
For borrowers today, though, agreeing to take out a payday loan with an annualized interest rate as high as 500% is only the start of the problem. Payday loans are marketed as a quick-cash solution for a brief period of time, but a lot of people can’t make the payment when it’s due. They then take out a new loan and the cycle begins again, until they’re in over their heads.
The Pew study found that 27% of payday loan borrowers get hit with checking account overdraft fees because they don’t have the money to make their loan payments. Nearly half of borrowers who use online payday lenders say they have incurred an overdraft fee when the lender tried to make an automatic withdrawal.
In theory, this shouldn’t happen if bank customers revoke a payday lender’s ability to dip into their account. “Federal law is clear that if the consumer has notified the bank orally or in writing up to three business days before the scheduled date that the consumer has revoked authorization, the bank must block all future payments,” says Lauren Saunders, managing attorney at the National Consumer Law Center.
But NEDAP staff attorney Susan Shin says bank customers are routinely denied that right in practice. They’re given the runaround or told that there’s nothing the bank can do. Naturally, the payday lenders aggressively go after the money they’re owed. They keep trying to make automatic debits even if the borrower’s bank account balance is negative and the customer has tried to have the lender’s access cut off. “We say banks are facilitating abuse… when they refuse to stop these payments,” Shin says.
According to the lawsuit’s plaintiffs, Chase hit customer accounts with overdraft fees of around $34 for each debit when the account fell into the red. Shin says when the negative balance grew to a point at which the bank stopped paying out, the lender attempted dozens more debits over a short period of time — each of which incurred a new $34 overdraft fee.
“Banks then charge their customers hefty fees for each of the repeated debits, further harming their customers, but generating substantial profits for themselves,” the lawsuit states.
Chase released a brief statement via e-mail explaining, “We are working with the customers to resolve this.”
While the Consumer Financial Protection Bureau and other federal initiatives have tried to rein in overdraft fees charged to bank customers, the fees remain big business, especially for big banks. Research company Moebs $ervices says that banks earned $31.5 billion in overdraft fee revenue for the fiscal year ending last June 30, a $700 million increase over the previous year.
And in general, the bigger the bank, the bigger the fee. The largest banks charge an average of $35 per overdraft. “We found that a financial institution’s asset size has a direct correlation to what it charges for overdraft fees – the larger the asset size, the heftier the fee to checking account holders,” Michael Moebs, CEO and economist at Moebs $ervices, wrote in a release last month.
In addition to a handful of state lawmakers, payday loans have caught the attention of the Consumer Financial Protection Bureau, as well. The agency is looking at several payday lending practices, and Director Richard Cordray said at an advisory board meeting last month, “One of our priorities is to make sure consumers who are deciding whether or not to take out a payday loan are presented with clear information about the risks and costs associated with that loan.”
Shin calls the dynamic between payday lenders and banks “really disturbing,” adding: “It seems like a blanket policy to not help people.”