Bank Payday Loans Continue; Regulatory Guidance Needed


Center for Responsible Lending
March 21, 2013

Seniors Face Particular Risks

Banks making payday loans continue to trap customers in a cycle of debt, a new study by the Center for Responsible Lending shows. Read the report, “Triple Digit Danger: Bank Payday Lending Persists,” at http://rspnsb.li/160xMHv

Banks pitch payday loans as short-term borrowing that allows customers to deal with a financial emergency, repay the loan, and move on. In fact, this new study provides further evidence that these triple-digit interest rate loans, averaging from 225% to 300% APR, trap borrowers in a long-term cycle of repeat loans. 

  • In 2011, bank payday borrowers took out an average of 19 loans.
  • Bank payday borrowers were two times more likely to incur overdraft fees than bank customers as a whole.
  • One of every four payday borrowers is a senior citizen receiving Social Security. 

The finding on Social Security recipients highlights how changes in federal rules make seniors even more vulnerable. As of March 1, 2013, Social Security benefits must be distributed electronically, through a prepaid card or direct deposit into a checking account. As part of this new mandate, the Treasury Department specifically prohibits Social Security benefits from being distributed on prepaid cards with payday loan features—but deposits into checking accounts remain vulnerable.

Banks offering payday loans—Wells Fargo Bank, U.S. Bank, Regions Bank, Fifth Third Bank, Bank of Oklahoma and its affiliates, and Guaranty Bank—say their product is not a payday loan because they call it an open-end line of credit. But this study confirms that these products are structured like non-bank payday loans and function the same way. These are short-term balloon loans that borrowers are unable to repay in full when due. They carry triple-digit interest rates, lack meaningful underwriting to assess a borrower’s ability to repay, and ensnare customers in a cycle of long-term debt that leaves them worse off.

Many states have passed laws to limit or prohibit payday lending, and federal law forbids payday loans to active military service members and their families—but some banks are ignoring both state and federal laws.

The report, an update of CRL’s 2011 report, “Big Bank Payday Loans,” urges the three prudential regulators—the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation—to issue guidance or a rule that would put an immediate end to this product before it spreads from a handful of banks to the entire system.

For more information, contact Kathleen Day in DC at 202.349.1871 or kathleen.day@responsiblelending.org; Graciela Aponte in Calif. at 510.379.5518 or graciela.aponte@responsiblelending.org; or Ginna Green at 510.866.5989 or ginna.green@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.