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. Given this scenario, the borrower is also likely to be charged an overdraft fee. Alternatively, the depository institution may return the payment request for insufficient funds. The authors refer to this as a “failed payment request.” In this report, the authors use checking account data from several large depository institutions to analyze ACH payment requests by a number of lenders that make online payday or other high-cost online loans with payments scheduled on a borrower’s payday.
Key findings include:
- Half of all accounts have at least one payment request that results in overdraft or failure due to non-sufficient funds during the 18 month observation period. These accounts are charged an average of $185 in overdraft and non-sufficient funds fees by their institution on attempted payment requests from online lenders during the 18 months.
- After a failed ACH payment request by an online lender, subsequent payment requests to the same consumer’s account are unlikely to succeed. After a failed payment request, 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.
- Accounts of borrowers who use loans from online lenders are more likely to be closed by the end of the sample period than accounts generally.
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