Court Clears New Fee Protections for Payday Borrowers

Regulators can now limit payday lenders dinging bank accounts multiple times

Young mom & baby using an automatic teller machine in a train station.
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Tang Ming Tung/Getty Images

Starting next year, payday lenders will no longer be allowed to repeatedly attempt to withdraw money from the bank accounts of customers who can’t pay them back, due to a recent court ruling.

Key Takeaways

  • A federal court ruled that starting in 2022, the Consumer Financial Protection Bureau can restrict payday lenders from dinging customers’ bank accounts multiple times if they fail at first due to insufficient funds. 
  • The practice can rack up high costs for payday borrowers, who often took out loans in the first place to avoid bank fees.
  • The rule was proposed in 2017 but it’s been tied up in court. 

Last week, a federal judge sided with the Consumer Financial Protection Bureau (CFPB), a watchdog agency, in a long-running court battle against payday loan trade groups over whether the bureau was allowed to impose a new rule on lenders of payday, vehicle, and certain high-cost installment loans. The regulation stops lenders from attempting to withdraw money from a debtors’ bank account if it had already failed in two consecutive tries—a practice that can result in borrowers being hit with multiple bank fees for returned payments and insufficient funds, and even having their accounts closed. In the Aug. 31 ruling, the U.S. District Court judge for the Western District of Texas said the new rule, first created in 2017, could go into effect in June 2022, giving the lenders time to appeal the decision.

Payday loans are short-term loans that come with extremely high interest rates and fees for the borrowers. When borrowers take out a payday loan, they often authorize the lender to debit their account for the funds when the loan comes due. If, when that day arrives, the lenders find the bank account doesn’t have enough money to cover the transaction, they will usually try again, sometimes for less money in hopes the smaller transaction will go through—often trying as many as five times, each time triggering overdraft charges. 

While these attempts are cheap for the lender, usually around 5 to 15 cents, they are costly for the consumer, with overdraft fees averaging $34 on top of other various charges, the CFPB said in the 2017 rule, citing a 2012 study. The added fees are especially harmful for borrowers who, according to the CFPB, often took out payday loans to avoid overdraft charges in the first place. Sometimes, the repeated collection attempts lead banks to close customers’ accounts. 

“I am pleased the court reaffirmed our ability to protect borrowers from unfair and abusive payment practices in the payday lending and other markets covered by the rule,” said David Uejio, acting director of the CFPB, in a statement.

The trade groups that brought the lawsuit, The Community Financial Services Association of America and the Consumer Service Alliance of Texas, said they would appeal.

“We are disappointed by the district court ruling regarding our challenge to the payment provisions of the CFPB’s detrimental 2017 small-dollar lending rule,” the groups said in an email. “The payment provision requirements remaining from the original rule impose unnecessary burdens on consumers and unwarranted costs on lenders, and make small-dollar loans less convenient and accessible for those in need of credit.”

The long and contentious history of the payday lending rule goes all the way back to the administration of President Barack Obama, when the newly formed CFPB began to investigate the payday lending industry, publishing a white paper in 2013, the first in a series of reports. The studies and reports didn’t turn into an actual rule, however, until 2017, when outgoing Obama-appointed CFPB director Richard Cordray published it as one of his final acts before resigning during the first year of the Donald Trump administration.

Before the rule could go into effect, Trump’s more business-friendly CFPB rescinded a major piece of the regulation that would have made lenders prove borrowers’ ability to repay, while leaving the part dealing with banks intact. But the rule has been tied up in court since 2018.

Borrowers who prefer to take matters into their own hands rather than waiting for government protections to kick in currently have the option to revoke permission from companies to electronically debit their accounts, although this doesn’t make the debt go away. Customers can do this either by contacting the loan provider or their bank.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.