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June 06, 2012
Advocates for a Fair Economy Call for End to Payday Lending by Banks
    by Robert Kropp

A coalition including several sustainable investment organizations ask federal regulators to investigate banks offering payday lending, which can trap low-income borrowers into a cycle of debt with interest rates as high as 417%.


In a letter sent earlier this year to the heads of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency, an extensive coalition of sustainable investors and other concerned stakeholders urged "the federal regulators of our nation's banks to take immediate action to stop banks from making unaffordable, high-cost payday loans."

The coalition of 250 advocates includes Pax World Funds and Trillium Asset Management, as well as nongovernmental organizations such as Americans for Financial Reform and the Center for Responsible Lending (CRL).

In a 2011 report, CRL observed, "The economic meltdown of the past few years has undermined the financial security of millions of Americans." As a result, many consumers have turned to so-called payday loans, which, according to CRL, "are small loans due in full on the borrower's next payday."

However, "research has repeatedly shown that the typical payday borrower ends up trapped in a cycle of repeat loans," CRL continued, and borrowers often end up paying annual interest rates as high as 417%.

Traditionally, payday lending has been conducted by "fringe" financial services firms. But in recent years, the letter to the regulators point out, major financial institutions such as Wells Fargo—themselves the recipients of taxpayer-funded, low-interest bailouts—have begun offering similar products. Loans are deposited directly into borrowers' checking accounts, and withdrawn by the banks on the following payday. If the borrower has insufficient funds to cover the loan, the withdrawal is made anyway and the borrower incurs additional overdraft fees.

In addition to now offering payday lending itself, Wells Fargo recently renewed a $483 million line of credit for World Acceptance, a payday lender.

The letter to regulators further warns, "There are clear signals that bank payday lending will grow rapidly without prompt regulatory action."

In his recent response to the letter, Martin Gruenberg, Acting Chairman of the FDIC, stated, "The FDIC is deeply concerned about these continued reports of banks engaging in payday lending and the expansion of payday lending activities under third-party arrangements."

"I have asked the FDIC's Division of Depositor and Consumer Protection to make it a priority to investigate reports of banks engaging in payday lending and recommend further steps by the FDIC," Gruenberg continued.

 

 
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