It's your friendly neighborhood bank offering loans that carry an annual
percentage rate (APR) averaging 365 percent, based on the typical loan term
of 10 days, according to the Center for Responsible Lending.
Big lenders are offering the short-term loans to checking account holders
who use a direct deposit feature. Customers get direct deposits from
employers, the Social Security Administration, and other sources in lieu of
payroll checks or other forms of paper payments.
Customers are allowed to borrow against the deposits before they are
actually deposited. The bank deposits the loan amount directly into the
customer's account and then repays itself by deducting the loan and interest
and fees directly from the customers next incoming direct deposit, the
Center says.
If within 35 days of the loan, the direct deposit is short of the loan
and interest due, the bank repays itself anyway, even if the repayment
overdraws the consumer's account, triggering still more fees and forcing the
borrower to tap the till again.
Using checking account data tracked by Lightspeed Research Inc., the
Center analyzed the bank payday loan activity of 614 checking accounts, over a 12-month
period.
The findings include:
• Long-term indebtedness.
Bank payday loan borrowers, on average, are in debt for 175 days per year,
nearly twice as long as the maximum length of time recommended by the
Federal Deposit Insurance Corporation (FDIC).
• Shrinking direct deposits. On average, 44 percent of bank
payday loan customers' next deposits go toward repayment of their loan. The
large take contributes to a long-term debt cycle.
• Bank payday loans target older customers. One in four bank
payday loan borrowers are Social Security recipients, who are 2.6 times as
likely to have used a bank payday loan as all bank customers. On average, 33
percent of a Social Security customer's deposit goes toward outstanding bank
payday loan and fee.
• Bank payday loans circumvent state and federal laws. Some
states outlaw payday loan lending or put
interest rate caps on the loans, but two national banks operate in states
with interest rate caps, claiming permission under federal law. Banks
likewise structure payday loans to evade federal interest rate cap rules
designed to protect the active-duty members of the military.
The Center recommends: "Payday loans...damage consumers' balance sheets,
drive families out of the banking system, and pose serious legal and
reputational risks to banks -- all of which ultimately threaten banks'
deposit bases. Federal banking regulators, especially the Office of the
Comptroller of the Currency and the Federal Reserve, who supervise banks
making payday loans, should immediately take meaningful steps to address
this product."
