Fraud and Abuse Online: Harmful Practices in Internet Payday Lending
Report shows borrowers experience steep costs, threats, unauthorized withdrawals, lost bank accounts
QUICK SUMMARYThis report, the fourth in Pew’s Payday Lending in America series, examines Internet-based payday loans and finds that lender practices often have serious detrimental effects on consumers. Online payday loans are more expensive than those offered through stores and are designed to promote renewals and long-term indebtedness, and they frequently result in unauthorized withdrawals, disclosure of personal information, threats against borrowers, and consumer complaints. This report reiterates Pew’s recommendations that the Consumer Financial Protection Bureau adopt strong, clear regulatory guidelines that will make the entire small-dollar loan market, including online payday loans, safer and more transparent.
1/3 of online borrowers had loans structured to automatically renew
One in 3 online borrowers has taken out a loan that was structured to encourage long-term indebtedness. These loans are set up to withdraw only the fee on the customer’s next payday, automatically renewing the loan without reducing principal or to increase borrowers’ costs with unnecessarily long repayment periods, such as eight months to pay off a $300 loan.
9/10 payday loan complaints to the Better Business Bureau were made against online lenders
Most payday loan complaints are aimed at online lenders, but online loans account for only about a third of the payday loan market. Most complaints deal with billing or collection issues. Other reported problems include fraud, harassment, and dissemination of personal information.
46% of online borrowers report that a lender made withdrawals that overdrew their checking accounts
This is twice the rate experienced by storefront borrowers. Pew also found that 39 percent of borrowers report their personal or financial information was sold to a third party without their knowledge; 32 percent report experiencing unauthorized withdrawals in connection with an online payday loan; and 22 percent report closing a bank account or having one closed by their bank in connection with an online payday loan.
30% of online payday loan borrowers report being threatened by a lender or debt collector
Threatened actions include contacting 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 threat types violate federal debt collection laws.
650% APR is typical for lump-sum online payday loans. They’re usually more expensive online than through storefronts.
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 Payday Lending in America report series has documented structural problems with payday loans, showing that they fail to work as advertised. They are packaged as two-week, flat-fee products but in reality have unaffordable lump-sum repayment requirements that leave borrowers in debt for an average of five months per year, causing them to spend $520 on interest for $375 in credit. This result is inherent in lump-sum repayment loans, whether from a store, website, or bank.
This latest report focuses on issues that are particularly problematic in the online payday loan market, including consumer harassment, threats, dissemination of personal information, fraud, unauthorized accessing of checking accounts, and automated payments that do not reduce loan principal. Recent news coverage has detailed these problems anecdotally, but this study is the first formal analysis of online lending practices to use surveys and focus groups, consumer complaints, company filings, and information about lenders’ spending on advertising and prospective borrower leads.
Many of the problems that borrowers report violate the best practices of the Online Lenders Alliance, the trade association and self-policing organization for these lenders.1 Although the overall findings indicate widespread problems, abusive practices are not universal. Some large online lenders are the subject of very few complaints and are urging a crackdown on companies that mistreat customers. Aggressive and illegal actions are concentrated among the approximately 70 percent of lenders that are not licensed by all the states where they lend and among fraudulent debt collectors.2
Some states have pursued action against online lenders for making loans to residents without obtaining state licenses or for other conduct that violates state laws. But state-level enforcement is often difficult, because the lenders may be incorporated in other states or offshore, or they may claim immunity based on an affiliation with Native American tribes. Intervention by federal regulators, including the Consumer Financial Protection Bureau and the Federal Trade Commission, has helped address some of the most serious concerns.3 But this intervention has not been sufficient to solve the problems that online borrowers experience. Only through strong, clear federal guidelines for the small-dollar lending market as a whole—ensuring that all loans are based on borrowers’ ability to repay and safeguarding their checking accounts—can these illegal practices be eliminated.This report documents Pew’s findings regarding widespread fraud and abuse in the online lending market and examines strategies that state and federal regulators have used to address harmful and illegal practices. It also provides an overview of additional regulation, particularly at the federal level, that would protect consumers while ensuring ready and safe access to credit.
1 “Best Practices,” Online Lenders Alliance, accessed Feb. 25, 2014, http://www.onlinelendersalliance.org/?page=bestpractices.
2 A review of Better Business Bureau data indicates few complaints against some large companies. Further, the Federal Trade Commission has not cited some firms for engaging in the type of illegal practices documented in this report. The Online Lenders Alliance has also supported efforts to crack down on some of the worst online practices (“Online Lenders Alliance Applauds FTC’s Action Against Fraudulent Debt Collectors” (July 1, 2014), http://www.onlinelendersalliance.org/news/180304/Online-Lenders-Alliance-Applauds-FTC-Action-Against-Fraudulent-Debt-Collectors.htm; and “OLA Applauds FTC Ruling Against Payday Loan Bad Actors” (Aug. 1, 2013), http://www.onlinelendersalliance.org/news/134958/OLA-Applauds-FTC-Ruling-Against-Payday-Loan-Bad-Actors.htm). LendUp, on its website, also separates itself from bad actors, stating, “It’s important to distinguish between reputable payday lenders and those that are looking to sell your personal information or trap you in a cycle of debt.” (“How Do I Choose a Short-Term Lender Online?” (June 16, 2014), https://www.lendup.com/blog/author/Kirk%20Robinson,%20Customer%20Insights.html). John Hecht, “Online Consumer Lending Industry Review: An Industry of Growth, Innovation, and Transition,” Stephens Inc. (Oct. 14, 2013). Presentation on file at The Pew Charitable Trusts.
3 “U.S. District Judge Finds That FTC Can Sue Deceptive Payday Loan Business Regardless of American Indian Tribal Affiliation,” Federal Trade Commission, accessed March 19, 2014, http://www.ftc.gov/news-events/press-releases/2014/03/us-district-judge-finds-ftc-cansue-deceptive-payday-loan.
Harmful practices, fraud, and abuse abound in a growing industry
Nick BourkeDirector, Small Dollar Loans
Nick Bourke directs Pew's research on consumer needs and perceptions, market practices, and potential regulation of payday and other small-dollar loan providers. The project also offers policy recommendations designed to protect consumers from harmful practices and promote safe, transparent credit.