Payday Lending Vilified Again
A new report from the Center for Responsible Lending has documented that payday lending at six large banks is continuing, and the reported alleged it is damaging consumers financially.
The center, which released the report on March 21, said the six banks are Wells Fargo, U.S. Bank, Regions Bank, Fifth Third Bank, Bank of Oklahoma and Guaranty Bank. None of the banks named responded to requests for comment on the report. But Wells Fargo has a frequently asked questions document on its website about its Direct Deposit Advance program.
“It is important to note this service is an expensive form of credit designed for short-term borrowing needs,” the Wells Fargo FAQ reads. “Alternative forms of credit may be less expensive and more suitable to your long-term financial needs. Talk to your Wells Fargo banker for more details.”
“Triple-Digit Danger: Bank Payday Lending Persists” is an update of a similar report that the Self-Help Credit Union affiliated organization prepared in 2011. In that report, the organization identified payday lending taking place, under different names, at the six banks. The new report updated the last by indicating that the lending was still going on and documenting some of its effects.
First, interest rates on the money are still very high. According to the report, an average 12-day loan at one of the banks runs between 225% and 300%.
Second, the median number of loans that an average borrower takes out is 14, while more than 33% took out more than 20.
Third, depositors that use the loans are twice as likely as others to incur overdraft fees, and more than 25% of borrowers receive Social Security payments.
The report also blames the loan’s structure for helping to force borrowers into taking out multiple loans.
“The fundamental structure of payday loans–a short loan term and a balloon repayment–coupled with a lack of traditional underwriting makes repeat loans highly likely,” the report contended. “Borrowers already struggling with regular expenses or facing an emergency expense with minimal savings are typically unable to repay the entire lump sum loan and fees and meet ongoing expenses until their next payday. Consequently, though the payday loan itself may be repaid because the lender puts itself first in line before the borrower’s other debts or expenses, the borrower must take out another loan before the end of the pay period, becoming trapped in a cycle of repeat loans.”
The report acknowledged that the banks assert that they have safeguards, such as installment payments, to keep the loans from becoming too financially burdensome. But the report charged the banks make the safeguards too difficult to use and that the number of loans per borrower strongly suggested they were ineffective. In Wells Fargo’s case, for example, the report indicated that the installment loan program is only open to borrowers who have already taken out three conventional direct deposit advance loans and owe more than $300 on existing loans.
The report calls on federal financial regulators to shut down the loan programs as they are currently structured and only allow them to restart under terms that are much more favorable to borrowers, including allowing affordable installments and capping interest at 36%.
Meanwhile, pressure against banks’ payday lending has been growing.
Two coalitions have written federal regulators once again calling on them to do something to reign in banks’ in-house payday loans.
In letters to chairmen of both the Federal Reserve and the FDIC, as well as to Thomas Curry, Comptroller of the Currency and Consumer Financial Protection Bureau Director Richard Cordray, the two coalitions expressed gratitude for pledges of action regulators have already made but said that those pledged actions now need to be made.
“Over the last year, the need for federal regulatory action has only become clearer,” wrote the unnamed consumer coalition, which included 260 groups and individuals. “Despite banks’ claims that these loans offer short-term, emergency solutions for their customers, banks have offered no data that would dispute that these loans are trapping their customers in long term, high-cost debt. And despite efforts of many of the undersigned groups to engage directly with banks making payday loans; heightened negative media attention; and public expressions of concern from state legislators, state regulators, and members of Congress, banks continue to make payday loans.”
The coalition included the AARP as well as the AFL-CIO.
The Cities for Financial Empowerment Coalition wrote in its letter that “research suggests that payday loans may actually push people out of the financial mainstream through involuntary closures of bank accounts,” and quoted an FDIC report on the topic that found “providing high credit on a recurring basis to customers with long lending; increases institutions’ credit, legal, reputational, and compliance risks; and can create a serious financial hardship for the customer.”
And there are indications the long running opposition to payday lending has begun to bear fruit.
J.P. Morgan Chase announced March 19 that, beginning at the end of May, it will only charge a fee for insufficient funds the first time a check is presented in a 30-day period and not an additional fee for every time the check might be put through. This is to lessen the costs of having a payday lender put a check through multiple times for a loan.
“This change is intended to address payday lenders and others who present repeated payments to customers that are not in the spirit of their signed agreement with the customer,” the bank said in the announcement.
The bank also announced it would start working to identify case of abuse of the Automated Clearing House system for checks and said it would report such abuse to the National Automated Clearing House Association.
The bank will also step up educating the public and its own staff about its policy on stopping payments and make it easier for depositors to close their accounts even when they have pending payday loan payments. “If we believe those pending charges are inappropriate, we won’t honor them,” the bank said.
“We took a look at our policies and decided to make a number of changes,” said Ryan McInerney, CEO of consumer banking at Chase. “Some customers agree to allow payday lenders or other billers to draw funds directly from their accounts, but they may not know some of the aggressive practices that can follow. Those practices include repeated attempts for payment that can result in multiple returned items. We don’t believe these practices are appropriate, and are making these changes to help protect customers from unfair and aggressive collections practices.”