For quite some time, payday loans have been in the crosshairs of several lawmakers on both state and federal levels. They say these companies are predatory, often with interest rates that hit triple digits. Still, there remains any true way to put them out of business. They’re operating legally, at least on the fringes, and those same lawmakers have no way – really – of forcing them to stop. Now, though, it appears the banks and even some credit unions around the nation are hoping those same lawmakers will back off. Turns out, they too are wanting in on the predatory opportunities.
Part of the reason is the 2009 CARD Act that significantly cut the opportunities for banks to collect unrealistic fees from American consumers. The big banks particularly had their own financial meltdowns that would make a two-year old’s temper tantrum look like a stroll in the park. It didn’t matter, though, the laws were put into place and the banks began feeling the pain. And worse – their options were further limited when they realized consumers had a bellyful. Remember the epic $5 debit card fee fail from Bank of America? It’s what spurred the Occupy Movement that continues to this day. So, of course, there had to be new ways to recoup of those losses and those new ways, as it happens, comes in the form of payday loans.
Pew Charitable Trust Study
The Pew Charitable Trusts released a report last week that has proven to be quite revealing. The question now, is, how will consumers react. After all, millions of consumers learned their banks were fleecing them and still others, due to tough economic problems, found themselves with a few bounced checks and a checking account that was at zero. Their options were limited so they turned to these payday loan companies in order to make the ends meet.
The banks were not willing to approve small personal loans, so those bank customers had to do something. And make no mistake – there is power in a scorned consumer. The last thing many of them are willing to do is to give those fees to that same bank that wasn’t there for them. If it sounds dramatic, it is – but it’s also realistic. Plus, many of those consumers took out the payday loans to cover those overdrawn fees charged by their banks. As one woman told us,
I asked my branch manager if he would be willing to waive even part of the fees that came from six bounced checks. He knew that it was one small error in my own math that set off a chain reaction and he also knew I’d never before bounced a check – not once in the twelve years I’d had my checking account. He refused.
She went on to explain that her Visa and Discover cards were close to being maxed out so they weren’t an option. She had a couple of brothers who had lost their jobs in their hometown because of a plant closing; they were already making plans to move back in with their parents, so she didn’t have family she could turn to. That left the payday loan company.
When she received a notice a year later from her bank announcing it was now offering a “convenient new service just for our bank customers who are strapped for cash”, she laughed.
They weren’t there for me when I needed them and I’ll be damned if I shell out those expensive fees to them now.
She says she paid her loan off at the payday loan company but she also knows how easy it could have been to fall into a pattern others routinely see themselves in.
What this woman describes also reveals how banks are benefiting from the companies. Because she was scrambling to bring her checking account current, she turned to the expensive products offered by these companies. The Pew report explains that in many cases, these consumers take out these loans to cover NSF fees because the banks are unwilling to work with the customer. The report states
Although payday loans are often presented as an alternative to overdrafts, most payday borrowers end up paying fees for both. The payday lenders make out, the banks make out – and the losers are their customers.
No Uniform Laws
If it seems some states are more apt to have these companies, it’s because laws vary from state to state. The companies often seek out the states with looser compliance laws. Plus, the companies also opt for visibility in lower income neighborhoods, which further lends to their predatory nature.
And now there are new problems for banks. Many consumers are suing their banks, claiming they shouldn’t allow the payday loan companies to tell them what they need to pull from their customers’ accounts. In fact, there’s a lawsuit now in New York in which two consumers say their bank used “illegal and exploitative tactics” against them and as a result, they had to pay thousands in penalties that they should have never been charged in the first place. The Neighborhood Economic Development Advocacy Project (NEDAP) is the group that brought the lawsuit and it said, in the suit,
banks shouldn’t be willing to let online payday lenders take money out of customer accounts in states where such loans are illegal.
The bank, through the American Bankers Association, fired back, stating it wasn’t the bank’s responsibility to question where payments are going.
New Bills in Congress
Despite the efforts of some banks to get in on the profits, there are several senators who have introduced a new bill in Congress. If passed, it will require payday loan companies to fall into compliance with the state’s laws that the borrower lives in and not the state it does business in or the state where it’s headquartered.
Over twenty states have passed legislation to stop abusive lending, but these efforts have been challenged by the growing online presence of payday lenders,
Jeff Merkley (D-OR) says in a statement about the bill.
Many are concerned about these trends and say new laws are exactly what’s needed to protect consumers.