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BK Blog Post
Posted by Wade Rathke.
Wade Rathke is the founder of ACORN (Association of Community Organizations for Reform Now) – a nationwide activist network engaged in community organizing.
New Orleans The Consumer Financial Protection Bureau (CFPB) released a recent report in the United States with the boring title “Online Payday Loan Payments,” but despite that, wake-up, this is important.
The report is ostensibly directed at online payday lenders, and there’s nothing wrong with that; they need a hard look. Many of them have created a business model out of trying to skirt state regulations designed to at least try to reduce predatory practices. The Attorney General in New York got a lot of publicity by going after a gang of them, including some that were adding insult to injury by operating from Indian reservations to claim yet another layer of impunity.
Anyway the top line of the report got a couple of seconds of attention over the fact that based on the CFPB findings the average payday lending victim in addition to paying the vig on the loan and a host of other penalties and fines that lard up the total price of the repayment, also pays an average of about $185 over 18-months in bank charges when the lender hits their account for payment and hits the account dry. They found that the average overdraft fee for these desperate consumers was $34 a hit. The report, examining 2012 data, determined that the overdrafts and NSF (non-sufficient funds) were routinely triggered by the payday lenders and the banks:
“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.”
The report also illustrates how this collusion of payday lenders and banks stubbornly victimizes the consumer. CFPB found that normal collections succeed 94% of the time, but of the 6% that fail, when the lenders keep hitting the account multiple days, 70% fail on the second hit, and subsequent hits or re-presentations, as they call them, bounce even higher and harder. Often in fact they found that they only succeed because the bank covers the hit, incurring yet more charges to the consumers. It’s kind of a surprise that they found about one-quarter of consumers with a payday loan had their accounts closed within a one-year period, because for banks this was a cash cow. They likely only pulled out because they couldn’t get any more blood from these stones.
If you wonder why banks have deserted the business of low-level consumer loans, the picture becomes clearer with this study: they make more with less risk by fleecing the customer on the overdrafts and NSFs, thanks to their buddies in the payday loan business and their computer programs. Although the CFPB work studied online payday lenders, most payday lenders require automatic account deductions for their payments as well, so it’s really the same mess, just with a physical address.
Studies in recent years by the FDIC found that banks make over $17 billion from overdrafts and NSF charges. The big three banks made more than $1 billion just between themselves. Besides making money from payday lending on the front end by loaning the money to the payday lenders to re-loan as predatory as they can get away with, banks are exploiting their victims with their partners help on the back end with these charges.
At the least we need to stop the pyramiding of fees and force the fees to represent real costs to the banks. Furthermore, when someone’s account runs dry, why allow them to keep going back to that well, unless it’s to lard on more fees. We also need to make all financial institutions come clean about how much they have their hands in these rip offs of cash-poor low and moderate income families.