Illinois consumers at risk of debt traps sprung by their own banks
FOR IMMEDIATE RELEASE
July 28, 2017
Contact: Brent Adams ● 312-368-0310 (o) ● 773-844-5544 (c)
The American Bankers Association has asked federal bank regulators, including the Office of the Comptroller of the Currency (OCC) and the FDIC, to repeal rules that led several banks to stop making payday loans to their customers in 2013. At the same time, as the Consumer Financial Protection Bureau (CFPB) continues its work on a rule to stop the payday loan trap, including bank payday loans, bankers are eager to block that future rule too. If they get what they want, then banks in Illinois and across the country would be free to make triple-digit interest debt trap loans just like payday loans. Both storefront payday loans and bank payday loans trap borrowers in long-term, high-cost debt.
A report released earlier this month by the national non-profit Center for Responsible Lending (CRL), “Been There; Done That,” outlines the threat to consumers. Before 2013, a few banks were stripping $500 million annually from their own customers through these debt trap loans. Those banks include Wells Fargo, US Bank, Regions Bank, Fifth Third Bank, Bank of Oklahoma and GuarantyBank.
“It is a bad idea to expand access to these dangerous loan products,” said Brent Adams, Senior Vice President of Policy at Woodstock. “The reasons for the rules are as valid today as they were when the rules were established: consumers should be protected from, not pushed into, debt traps.”
Payday loans are marketed as quick fixes to financial emergencies, but research shows that repeat borrowing drives the payday lending business model. CRL documented that the median bank payday borrower had 13.5 loans per year and was in debt at least part of six months annually. And in 2013, the CFPB found that borrowers spent an average of 114 days during the year in triple-digit debt. The CFPB also found that over half of borrowers had more than ten loans annually, and 12% had more than 30 loans annually. Borrowers regularly report difficulty paying living expenses, delinquency on credit card and other debt, delayed medical care, overdraft fees, loss of checking accounts and bankruptcy.
The guidance by the OCC and FDIC and the pending rule by the CFPB are based on the commonsense principle that lenders should assess the ability of their borrowers to afford the loan before making it. A proposal to accomplish this by limiting the loan payment to 5% of the borrower’s income would not protect consumers because it does not take the borrower’s expenses into account in determining affordability.
The OCC and the FDIC should keep the guidance in place, and the CFPB should issue a strong payday lending rule, without exceptions to this ability to repay requirement, as soon as possible. These protections help keep banks and other predatory lenders from making unaffordable loans. Banks should stay out of the predatory payday lending business and instead support measures that reform payday lending like the CFPB payday lending rule in Illinois, and support other ways to invest in communities that build wealth rather than strip it away.