National Consumer Law Center has uncovered a spreading Main Street bank trend in the payday lending world.
Back in 2008 I had written an article about Kinceta Federal Credit Union in California that felt being in the payday loan business was good for their customers.
At the time, the thought that a bank or credit union would get more into the payday loan industry seemed farfetched.
But today, Fifth Third Bank, Guaranty Bank, Regions Bank, U.S. Bank and Wells Fargo are doing just that.
On one hand, it’s a good thing, but on the other, well….
A payday lender serves a population that might not have a regular banking relationship. The payday outfit may also be a check cashing outfit that helps to serve people who fall outside the traditional financial services relationship.
So when the local bank gets into advancing cash like a payday lender it’s not really serving the underlying unserved community, it’s just penetrating payday loans into their existing customer base.
Here are some of the terms offered by your local main Street bank for payday loans.
The way the process works at the bank is they will advance you funds if you have a direct deposit of Social Security or other public benefit. The next time the deposit arrives the bank will take up to half of it to repay the cash they advanced. That can create a bog problem for consumers.
The National Consumer Law Center states:
Bank payday loans evade protections for Social Security, disabled and unemployment benefits and other laws designed to ensure that creditors cannot grab income needed for food, rent and medicine. Banks do not consider ability to pay and take up to half of the borrower’s next pay or benefits check, even if the person is on the poverty line. Banks offer 300% payday loans to military servicemembers by using a loophole in the law that normally limits military loans to 36% APR.
Another examination of this practice by the Center for Responsible Lending found that 44 percent of the customer’s next deposit was used to repay a previous loan. This setup people to fall short and have to borrow again.
In an effort to help defend readers against these practices I’ve submitted my public comments on this issue to the Office of the Comptroller of the Currency. My public comments can be seen below.
My OCC Public Comment I Submitted
August 6, 2011
Office of the Comptroller of the Currency
250 E Street, SW
Mail Stop 2-3
Washington, DC 20219
Re: OCC Guidance on Deposit-Related Consumer Credit Products Docket ID OCC-2011-0012
Dear Acting Comptroller Walsh:
I write to comment on the OCC’s proposed guidance on overdraft programs and “deposit advance products,” high-cost payday loans offered by banks. Banks should not be engaged in such lending without strict safety measures in place to protect targeted consumers.
A growing number of banks are offering 300% to 2,000% APR payday loans, often called “advance deposit programs.” The typical cost is $10 per $100 loaned, repaid a few days later with the next direct deposit of wages or public benefits. These loans lead to the same cycle of debt as traditional payday loans.
If banks are allowed to issue such loans they should not be allowed to exceed the mandatory limits already imposed by the payday loan laws of the state the bank branch is located in that is making the cash advance.
In addition, the banks should not be allowed to extend more than one loan at one time to any consumer and require that the next loan is not available for at least 30 days. Hopefully this process will break the cycle of rolling loans forward and perpetuate a cycle of debt that the targeted disadvantaged borrower is most likely to be on the verge of.
The OCC’s guidance may only legitimize these irresponsible lending practices by banks. Instead, the OCC should:
Prohibit bank payday loans, which trap customers in high-cost, unaffordable debt.
Require banks to proactively evaluate if the borrower can afford to repay the loan with the next deposit and still meet their critical financial obligations at the same time.
Not steer customers who rely on direct deposit benefits to deposit advance products.
Yours very truly,