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February 27, 2013
Investors Question Payday Lending by Banks
    by Robert Kropp

The US Consumer Financial Protection Bureau contemplates regulations to protect against consumer debt traps, while ICCR members call on major banks to address their own risky lending products.

In recent prepared remarks, Richard Cordray, the Director of the US Consumer Financial Protection Bureau, indicated that the agency will seek to protect consumers from abuses by payday lenders and other short-term loan products.

The Center for Responsible Lending defines payday loans as "small loans marketed as a quick, easy way to tide borrowers over until the next payday."

"However," the Center continued, "The typical payday loan borrower is indebted for more than half of the year with an average of nine payday loan transactions at annual interest rates over 400%."

In his remarks, Cordray referred to such products as "debt traps," and said that they "trigger a cycle of debt whose substantial costs over time can disrupt the precarious balance of people's financial lives."

"For a considerable number of consumers, the fees will pile up and leave them worse off," Cordray said. "The economics of the product are premised on this very fact."

An article published in Saturday's New York Times notes that while increasing numbers of states are banning the practice, payday lenders are responding by moving to more hospitable locations, often overseas.

As a result, "Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is," the article states.

Payday lending may have originated in strip mall storefronts, but it has long since moved to the Internet. The terms of such loans usually include lenders making automatic withdrawals from the bank accounts of borrowers. However, as a recent report by the Pew Charitable Trusts reveals, "most borrowers are dealing with persistent cash shortfalls rather than temporary emergencies."

"Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan," the report found.

As a result, those automatic withdrawals by payday lenders have resulted in significant overdraft charges for already overburdened borrowers. "More than half of payday loan borrowers have overdrafted in the past year," Pew found. "In addition, more than a quarter report that overdrafts occurred as a result of a payday lender making a withdrawal from their account."

According to the article in The Times, major banks—including JPMorgan Chase, Bank of America and Wells Fargo—are complicit in the payday lending practices because overdraft "fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars."

While federal law allows customers to stop automatic withdrawals from their accounts, "Some borrowers say their banks do not heed requests to stop the loans," the article states.

Furthermore, increasing numbers of banks are getting into the business of "offering struggling customers high-cost direct deposit advances that resemble payday loans and could ensnare them in costly 'debt traps'," according to the 2013 Proxy Resolutions and Voting Guide of the Interfaith Center on Corporate Responsibility (ICCR).

As a result of the practice, ICCR members have filed resolutions with four banks—Fifth Third, Regions, US Bancorp, and Wells Fargo—requesting that they "report on the adequacy of their direct deposit advance lending policies in light of their potential to catalyze instability in both the housing and financial markets."

"In recent years, a host of predatory lending practices have cost households billions in fees and catalyzed instability in both the housing and financial markets," one resolutions states. "Payday lending can perpetuate this instability, draining productive resources from the bank's own customer base and the economy as a whole."

"This lending may pose significant regulatory, legal, and reputational risks" to banks that offer such products, the resolution continues. "We believe responsible practices that are designed to strengthen rather than weaken customers' financial health are in the best interest of our company, its clients, the communities it operates in, and our economy."

In 2012, a coalition of sustainable investors and other concerned stakeholders wrote to federal regulators, requesting that they "take immediate action to stop banks from making unaffordable, high-cost payday loans."

"Payday lending by banks undermines state law in the states that have prohibited or imposed meaningful restrictions on payday loans in recent years, or that have never allowed payday loans to be part of their marketplace," the coalition wrote. "It also undermines provisions of the Military Lending Act aimed at protecting service members from payday loans."


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