WASHINGTON—The Pew Charitable Trusts today released a report detailing fraudulent and abusive practices associated with payday loans offered online. The study found that Internet loans are more expensive than those offered through storefronts; that they are designed to promote renewals and long-term indebtedness; that many online borrowers report being threatened by lenders or debt collectors; and that the vast majority of payday borrower complaints are about online loans. Pew calls on federal regulators to address these problems by establishing strong, clear, and consistent consumer protections for the small-dollar lending market as a whole.
The report, Fraud and Abuse Online: Harmful Practices in Internet Payday Lending, is the fourth in the “Payday Lending in America” series produced by Pew’s small-dollar loans project. Problems in the online payday loan market have been chronicled anecdotally, but Pew’s report is the first formal analysis to use surveys and focus groups, consumer complaints, company filings, and lenders’ spending on advertising and prospective-borrower leads.
“Our report makes clear that abusive practices in the online payday loan market not only exist but are widespread,” says Nick Bourke, Pew’s small-dollar loans project director. “State and federal regulators have taken steps to rein in fraud and abuse, but they need to do considerably more to keep borrowers from being harmed or further entrenched in unaffordable debt, especially as these loans become more prevalent.”
The report found that aggressive and illegal actions are concentrated among the approximately 70 percent of lenders that are not licensed in every state where they lend and among fraudulent debt collectors. Such lenders claim to be exempt from the authority of state-level officials, so federal action will be necessary to stop the abuses.
Among the key findings in Pew’s report:
- Many online loans are designed to promote renewals and long-term indebtedness. One in 3 online borrowers has taken out a loan that was set up to withdraw only the fee on the customer’s next payday, automatically renewing the loan without reducing principal. To pay more, most of these borrowers had to make a request by phone. Other online loans increase borrowers’ costs with unnecessarily long repayment periods, such as eight months to pay off a $300 loan or by including some payments in the installment schedule that do not reduce the balance.
- 30 percent of online payday loan borrowers report being threatened by a lender or debt collector. Threatened actions include contacting borrowers’ family, friends, or employers, and arrest by the police. Online borrowers report being threatened at far higher rates than do storefront borrowers, and many of the types of threats violate federal debt collection laws.
- Unauthorized withdrawals, aggressive practices, and disclosure of personal information are widespread in online lending, placing borrowers’ checking accounts at risk.
- 46 percent of online borrowers report that lenders made withdrawals that overdrew their checking accounts, twice the rate of storefront borrowers.
- 39 percent report that their personal or financial information was sold to a third party without their knowledge.
- 32 percent report experiencing an unauthorized withdrawal in connection with an online payday loan.
- 22 percent report closing a bank account or having one closed by their bank in connection with an online payday loan.
- Nine in 10 payday loan complaints to the Better Business Bureau are made against online lenders, although online loans account for only about one-third of the market. Most complaints deal with billing or collections issues, which include unauthorized bank debits, failure to explain or substantiate charges, failure to correct billing errors, and improper collection practices. Other reported problems include fraud, harassment, and dissemination of personal information.
- Online payday loans are usually more expensive than store loans. Lump-sum loans online typically cost $25 per $100 borrowed per pay period—an approximately 650 percent annual percentage rate. Online installment loans, which are paid back over time in smaller increments, range in price from around 300 percent APR—a rate similar to those charged for store-issued payday installment loans—to more than 700 percent APR from lenders who are not licensed in all of the states where they lend. The main driver of these high costs is the frequency with which loans are not repaid: Defaults are more common in online lending than in storefront lending.
Pew’s report calls upon the Consumer Financial Protection Bureau and other regulators to adopt stronger guidelines for the entire small-dollar loan market, including online lending, that reflect the following principles:
- Ensure that the borrower has the ability to repay the loan as structured.
- Spread costs evenly over the life of the loan.
- Guard against harmful repayment or collections practices.
- Require concise disclosures of periodic and total costs.
- Continue to set maximum allowable charges.
The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public, and invigorate civic life.