Big Banks Wading Into Payday Loan Businesses

It used to be that payday loans – the legal equivalent of loan-sharking – were something you got on the Internet or from some hole-in-the-wall storefront.

But now big banks are getting into the business. And just like the loans made by their shadier cousins, the payday loans made by banks carry sky-high interest rates — an average 365 percent APR — and, though marketed as short-term debt, regularly lead borrowers into long-term debt, a new study finds.

The report from the Center for Responsible Lending finds that, on average, a bank payday loan is repaid within 10 days, eats up 44 percent of a borrower’s next deposit, and often creates the need for a subsequent loan.

As a result, borrowers stay in debt an average of 175 days, paying over $900 in interest to borrow $500 for less than 6 months.

The study also found that nearly 25 percent of  these payday loans went to Social Security recipients, who were 2.6 times as likely to have used this type of loan compared with other customers. A 365 percent APR worsens financial challenges facing seniors living largely on government benefits, even as more affordable loan products could ease the situation for many.

Loaning cheap money at high rates

Banks are offering these triple-digit interest loans even as they enjoy record-low rates to borrow from the Federal Reserve, unlike smaller payday lenders who generally are in debt to – you guessed it – the big banks, who are only too happy to keep the payday loan industry afloat.

The features and impact of payday loans offered by banks make them the same as payday loans offered by non-banks. Seventeen states restrict payday loans, and a federal law curbs their availability to military families. Yet bank regulators allow banks to evade these restrictions.

“Banks should not be above state and federal efforts to protect consumers from high-cost loans,” said Center for Responsible Lending president Mike Calhoun. “Bank regulators, particularly the Office of the Comptroller of the Currency and Federal Reserve, should stop banks from making payday loans.”

The Consumer Financial Protection Bureau, which formally goes into operation today, should quickly assume the job of overseeing large financial institutions to police against predatory products, Calhoun said.

He said one of the CFPB’s first tasks should be to collect data from banks on the use and impact of payday loans, to make that data public, and to use its new authority to halt this harmful product.