Regulators have shown sharpened interest over the last year in payday loans by big banks, which carry fees that can add up to a 300 percent APR, but these products persist and consumer advocates are urging reform to reduce their costs.
The median bank-payday borrower took out 13.5 loans in 2011, and spent at least part of six months during the year incurring fees tied to these short-term loans, according to a new report from the Center for Responsible Lending, which has focused attention on these products more commonly offered by non-bank lenders.
The cost for bank payday loans ranges from $7.50 to $10 per $100 borrowed — that means they carry an annual percentage rate (APR) that averages 225 percent to 300 percent, CRL said. The average loan term is 12 days. This means the bank repays itself from the borrower’s next direct deposit an average of 12 days after the bank extended the credit.
This finding is somewhat consistent with previous research by CRL that analyzed 2010 data. That initial report found an average loan term of 10 days. At that time, all bank making payday loans charged $10 per $100 borrowed, so the cost in annual percentage rate terms was 365 percent.
“In this paper, we update and expand our original analysis using more recent data,” CRL said. “We find that, even while each participating bank continues to claim that these products are intended for short-term emergencies rather than long-term use, and despite marginal recent changes to product terms, bank payday loans are continuing to trap borrowers in high-cost, triple-digit debt.”
The latest report also found that bank payday borrowers are two times more likely to incur overdraft fees than bank customers as a whole. And more than one-quarter of all bank payday borrowers are Social Security recipients.
CRL said that no additional banks have entered the payday market since its previous report released in July 2011, but those few banks that were making payday loans then — Wells Fargo Bank, U.S. Bank, Regions Bank, Fifth Third Bank, Bank of Oklahoma and its affiliate banks, and Guaranty Bank — continue to do so.
Banks have pitched their payday loans as a way for customers to avoid overdrafts and associated overdraft fees, CRL said.
However, its analysis finds that nearly two-thirds of bank payday borrowers also incur overdraft fees, and these borrowers were two times more likely to incur overdraft fees than bank customers as a whole.
“This finding is consistent with what consultants selling bank payday loan software have promised banks — that payday lending will result in little-to-no “overdraft revenue cannibalization” — and prior research finding that non-bank payday loans often exacerbate overdraft fees, leading to checking account closures,” CRL said.
Recent federal action by regulators has been encouraging, the organization said. In May of 2012, the FDIC announced that it was “deeply concerned” about payday lending by banks. The FDIC said it was investigating the practice.
In July of 2012, the OCC testified before lawmakers that payday lending is “unsafe and unsound and unfair to consumers” and that the profitability of payday loans “is dependent on effectively trapping consumers in a cycle of repeat credit transactions, high fees, and unsustainable debt.”
The CRL is calling for regulators to “take immediate supervisory and/or enforcement action to stop” Wells Fargo and the other banks from “making unaffordable payday loans.”
Regulators should require that any small-loan product be:
- Repayable in affordable installments over at least 90 days;
- Reasonably priced, carrying an effective annual percentage rate of 36 percent or less;
- Underwritten based on an ability to repay the loan Without taking out another loan shortly thereafter; and
- Not require mandatory automatic repayment from the consumer’s checking account.