30% of Online Payday Loan Borrowers Threatened by Lender or Debt Collector

The Pew Charitable Trusts Friday released a report detailing fraudulent and abusive practices associated with payday loans offered online. The study found 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.

The report 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.