Bank regulators released proposed rules on April 30 that, at long last, would enact strong consumer protections for “deposit advance products”—essentially, payday loans offered by a mainstream bank. To hear it from the banks, making sure that borrowers can pay back loans and preventing an endless cycle of debt would somehow make consumers worse off (“Banking group says new regs could push consumers into risky payday loans,” April 28).
The banks’ arguments are backwards. The fact is, regulators rightly propose to end the worst practices of an industry that profits off trapping consumers in high-cost debt for long periods of time. Bank payday loans badly needed reform.
The Consumer Financial Protection Bureau released a market analysis of payday loans, both bank- and storefront-based, the day before the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced the proposed guidance. The CFPB report confirms that many features of bank payday loans are detrimental to consumers.
Bank payday loans are not affordable. The CFPB found that bank payday loans often have annual percentage rates of more than 300 percent. Banks rarely assess borrowers’ ability to repay the loans in the context of their other financial obligations, such as living expenses and other debt.
Bank payday lenders frequently claim that their products fill emergency credit needs. The CFPB report demonstrated that, in reality, these products generate their own demand by ensnaring borrowers in a cycle of debt. If a borrower cannot afford to repay the full loan amount when it comes due, he or she must take out another loan to repay the balance. The CFPB found that bank payday borrowers take out a median of eight loans per year, while more than a quarter of borrowers take out at least $6,000 in loans per year, translating to more than 15 loans. On average, bank payday borrowers were in high-cost debt for seven months out of the year. Clearly, these loans are not primarily used for emergencies.
Since bank payday lenders have access to borrowers’ bank accounts, they can debit the loan repayment as soon as the next direct deposit clears—prioritizing payday loans over necessities such as rent, groceries, and utility bills and potentially triggering overdraft fees. The CFPB found that bank payday borrowers were, on average, more than four times as likely as non-borrowers to incur overdraft fees.
The bankers did get one thing right: there is insufficient oversight of the myriad non-bank payday lenders, from those at the corner store to those available at the click of a mouse. Consumers need a strong set of minimum, uniform protections that will ensure that, no matter where they access credit, they will not be saddled with predatory, high-cost loans. States with stronger consumer protection laws than a federal minimum should be able to enforce them in their jurisdictions. The Protecting Consumers from Unreasonable Credit Rates Act (S. 673), sponsored by Sen. Dick Durbin (D-IL), would enact a national usury cap of 36 percent annual percentage rate across all consumer credit transactions, ensuring reasonable costs for all types of credit. We urge Senators to take a stand against the payday loan industry and support S. 673.
The CFPB has authority to promulgate consumer protection rules for all payday products, but the Dodd-Frank Act prohibits the CFPB from imposing a rate cap. We urge the CFPB to draft strong rules for all payday products that would end the cycle of debt by requiring sound lending based on ability to repay the loan while covering existing needs and debts, limiting roll-overs and the amount of time borrowers can be in debt, prohibiting balloon payments, and ending the practice of triggering loan repayment as soon as a deposit comes in.
The writing is on the wall: payday loans harm consumers who can least afford it, and it’s high time to reform them across the board. Every day that goes by without strong rules perpetuates a toxic cycle of debt for consumers.