The Big Banks’ exit from PayDay Lending is Great! (er..just OK) Point/Counterpoint

In the spirit of 60 minutes with a nod to SNL, Consumer Courage presents a Point/Counterpoint on the recent news that many major lenders have exited the Check Overdraft (and by association the PayDay lending) business.  

When ‘protection’ doesn’t really protect you

A few weeks ago, the news media were all a-twitter (or, maybe I should say ‘all a-flutter’ since Twitter is now actually a thing….anyway) were all a-flutter with the news that several lenders had formally disowned their previous predatory practice of giving overdraft ‘protection’ to their customers. (it was reported as an end to PayDay lending, which, as we will see acts in exactly the same way)    

What is overdraft ‘protection’ anyway? We are all familiar with what happens when a check bounces – you get hit with a $35.00 fee and your name goes on a list at the store where you wrote the check. 

Add ATM card and check-cashing cards into the mix and it gets a little more complicated.  Banks absolutely LOVE these cards, because they can charge you (and the merchant) all sorts of fees every time you use them.  Banks also realize that the more you used an ATM/check-cashing card, the more likely you are to forget exactly how much you have in your account.  When this happens, your accounbt becomes overdrawn.  But, since the overdraw may happen because of an ATM withdrawal, it’s a little hard for the bank to hit you with a bounced-check fee.  So, as a ‘courtesy’ to the consumer,  banks automatically sign people up for overdraft ‘protection.’  The protection is administered thusly: rather than let your check bounce, they ‘lend’ you money when the balance on your account finds its way into negative territory.  If you try to withdraw more than you had in your account or bounce a check, they cover the difference for you.  (“Go on………….”) 

They charge a fee to cover their expenses.  And you pay them back, when you get your next paycheck. (“Seems good so far……..”)   However, at some point banks realized that they could rearrange the order that your transactions were posted to your account, so it looked like you overdrew MORE often and incurred MORE fees. (“Wait…..What?”)  And, they realized that rather than just having the ATM say “insufficient funds to process request,” when you tried to take out more money than what you had available, they would just give you the cash without telling you that you were overdrawn and charge you fees and interest. (“You’ve GOT to be kidding me?”)   And, when it came time for you to pay them back, they would just swipe the overdrawn balance (plus fees and interest) from your next deposit and not tell you that your balance was even further in the RED, until you got your next statement. (“I give up!…..”)

Because this ‘protection’ was being put onto your account, without giving you the right to say ‘I don’t really want it;’ because the interest rate was so high; and because many people were forced to keep borrowing money from the bank to cover the shortfall that was created by the fact that they paid themselves back from your next deposit (again without permission), these ‘protection’ loans were referred to as a type of PayDay lending.  Since lenders are not required to report the number of these ‘protection’-type loans that they give out, the exact size of the market for overdraft loans can only be estimated.  But, according to the Consumer Financial Protection Bureau (CFPB), in 2012 the lending industry benefitted by overdraft protection programs to the tune of $32 Billion.      

It’s understandable why Consumer advocates were up in arms about these loans.  Account-holders were being lent money at interest rates that they didn’t know about and at times when nobody would agree that it was a good idea to use the ‘protection.’ (For example: it was not unusual for somebody who had $19.50 left in their account to ask for $20.00 from the ATM machine.  Instead of saying “you have insufficient funds for this withdrawal,” the machine would dispense a crispy new $20.00 bill.  For the right to overdraw their account in the amount of fifty cents, the borrower would be hit with a $35 overdraft fee and $15 in interest.  Then, when the borrower made their next deposit, the bank would have the right to take $50.50 off of the top of the consumer’s account, without warning.

Until recently, nearly every major bank offered this overdraft ‘protection.’  Because new regulations issued by the FDIC and the OCC make it harder for banks to take funds from your accounts, the major lenders started dropping their overdraft ‘protection’ programs one-by-one.  Is it good?  Certainly.  If banks have fewer ways to nail you with fees that you don’t know about and can’t negotiate, it’s always good.  But, how good is it?  Reviews are mixed. 

Editor’s confession: thus far, it appears as if Consumer Courage is the only one who remains skeptical about this news as being a ‘victory’ for consumers.  This is reflective of the malady, which is referred to by the official wife of Consumer Courage as “Maybe there’s a reason nobody else agrees with you.” But, I digress……….

POINT:  It is great news that the major banks are out of the ‘PayDay’ (Overdraft ‘protection’) business.

Presented by David Rothstein, Director of Development for NHS of Greater Cleveland

Consumer Courage dedicates a good deal of time warning against payday loans. With good reason, given the high interest rates, balloon payments, and cycle of debt that payday loans carry. Not to mention, they are not legal in Ohio! For more on that, please see previous policy reports  I wrote while working for Policy Matters Ohio.

Friday, January 17, was a banner day for advocates against payday lending. Three national banks ended their deposit advance programs, which function like payday loans, allowing account holders to borrow against their future direct deposits. Talk about a debt trap!

We are all for financial institutions offering small dollar loans but without looking at the ability to repay and offering sufficient time to repay, the “early access” and “account advance” programs were costing hundreds of dollars to consumers. What’s more, if banks can escape state usury caps with high-cost loans, we open up a wild west for lending. Some states (like our neighbors in Pennsylvania, New York and West Virginia) regulate payday loans. Ohio has a law that restricts the APR on payday loans to 28 percent or less – but it is not enforced.

This begs the question: Why we are so excited about big banks getting out of the payday business? If federally chartered banks are allowed to offer usurious loans, it renders state laws useless. It gives mega-bandwidth to payday lending with more accounts and marketing power than the traditional storefront lenders. It also provides a direct link from the loan to a bank account through direct deposit from an employer or government assistance. Everyone stepped on this one. From advocates to the bank regulators, we worked hard to address bank payday before it spread to become as common a practice as ATM withdrawals.

COUNTERPOINT:  It is (not particularly) great news that the major banks are out of the ‘PayDay’ (Overdraft ‘protection’) business, because they are still providing capital to the PayDay lending industry.

Presented by Mark Wiseman, Director of the NHS Consumer Law Center.

Thank you David for setting the stage.  It’s wonderful that the major banks have stopped offering overdraft protection programs.  But, color Consumer Courage as skeptical.  Banks have made $Billions on overdraft ‘protection’ programs in the last few years.  Does anybody think that they are just going to walk away from that kind of profit?  In truth, they have been in the PayDay business for many years, even if they don’t have a window at the bank that says “PAYDAY LOANS HERE.” 

How have they been doing this?  Most of the major lenders have been providing the cash that is used by the storefront PayDay lenders in their regular course of business.  According to the Center for Responsible Lending, the average Payday loan comes with an interest rate of 300%, and its terms force the typical borrower into the ‘cycle of debt’ where they have no choice but to take out 8 – 10 PayDay loans in a row.    

According to this report from National People’s Action, the five major lenders (Wells Fargo, JPM, PNC, US Bank, Bank of America) issued lines of credit to the PayDay lending industry.  In 2010, these lines of credit covered 38% of the entirety of the industry.  These lines of credit are the oil that makes the PayDay lending industry run.  If they can’t borrow money themselves, there will be no cash to lend to the consumers who walk into their stores.  

Is PayDay illegal in Ohio?

Well, yes and no.  The Ohio Legislature enacted a statute in 2008 that was intended to put a rate-cap on the PayDay lending industry.  They were following the Federal model that capped PayDay loans to military personnel at 36%.  Unfortunately, as that law was being passed in Ohio, the PayDay industry was busy registering their businesses under Ohio’s Second Mortgage Act and the Mortgage Lending Act, taking advantage of a loophole that was created by all of the carve-outs that had been placed in those statutes.  And even though 68% in the entire state of Ohio voted to cap PayDay loans at 36%, they still lend money to consumers at interest rates in the neighborhood of 400%.  

The Ohio experience has jaded those of us advocating for Consumer rights.  It seems that no matter what victory we claim, it’s practical effect is short-lived.  (Many of us are still suffering from a loss of cognitive function caused by the concussive effects of the ‘Homebuyer’s Protection Act of 2006’)  While we read about the Banks being ‘Out of the PayDay loan business’ we still drive by several PayDay lending storefronts on our way to work every morning.  As if on cue, here’s the first indication that the banks have already started planning their re-entry into the PayDay market.  

“We are used to making this money”

Before the CFPB was created, the Federal Reserve in Washington, D.C. used to convene a  ‘Consumer Advisory Council,’ once every quarter to discuss emerging consumer issues and provide some insight for the Board of Governors about the state of Consumer Law.  Consumer Courage served on this panel with many wonderful Consumer Advocates, along with some professionals who represented the interests of the banking/lending world.  During one such meeting, the Federal Reserve was mulling over whether to tinker with a fee (a so-called ‘Exchange fee’) that credit card companies charged to business that processed credit card payments.  The total industry profit from this particular fee was between 8 and 9 Billion dollars.  In opposition to the change, one particular gentleman (who was the National portfolio manager of a rather large credit card company) told the Chairman of the Federal Reserve and the Governors who were at the meeting the following: “We are used to making this money.  You can’t make this change.  If we have to figure out where we are going to replace this income, we are most likely going to have to stop providing free checking to the poor.” 

And there you have the seeds of our skepticism.  That an industry executive is able to think to himself “well, if they mess with my bottom line – forget the reason – I’ll just zing all the poor people I can find,” is outlandish.  That he felt comfortable to transmit those thoughts to the people who design and implement the monetary policy for our entire Country shows an arrogance that is beyond description.   Feel free to cheer this news……………..while it lasts 

Posted by: David Rothstein and Mark Wiseman (who have never been insulted by Dan Akroyd)

The Other Shoe Drops on Payday Lenders

Today, the Consumer Financial Protection Bureau released a White Paper that discusses PayDay Lending and Deposit Advance Products.  It is no secret what the advocate community thinks about PayDay Lending.  In fact, if you visit the website for the Center for Responsible Lending, you could learn a lot about how the industry works and whether the nickname “Legalized Loan-Sharking,” is deserved: 

2003: That PayDay Lending stripped Billions from the economy;  

2008: That PayDay Lending had an unusually high impact of wealth-stripping in communities of Color;  

2009: That PayDay Lending was a mere stepping-stone to bankruptcy and financial ruin;

2011: That PayDay Lending was the entry door to long-term, unmanageable debt;   

In case you prefer more recent data, David Rothstein has looked at the CFPB’s White Paper and opined about what it all means.  His post (which first appeared on the New America Foundation’s website) is below, in its entirety:

As it turns out, consumer advocates might have underestimated the impact of payday loans on consumers. We have written pretty extensively about the debt trap or cycle of borrowing that short-term, high-cost loans have on consumers. We are now getting real data and first impressions are that it is worse than we thought. The good news is that federal regulators are poised to take action. The recent, incredibly detailed report  by the Consumer Financial Protection Bureau (CFPB) revealed that the average consumer takes out 11 loans per year, paying $574 in fees (not including the principle balance). A quarter of borrowers paid more than $700 in fees. The argument that emergencies arise and people need short-term access to credit just doesn’t hold water with this latest data. Check out their infographic illustrating their findings. We blogged earlier about Pew Charitable Trust’s research that found recurring expenses accounted for the vast majority of payday borrowing. So, if someone is drowning…do you throw them a life preserver or a brick? The next step after data analysis is action and the Washington Post is reporting that the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) will be issuing regulations on bank payday loans or direct-deposit advances. Bank payday loans are problematic for all the reasons that storefront loans are troubling but also because they squeeze in between state usury laws on small dollar loans. Included in this guidance, we are hoping to see mandatory “cooling-off” periods between advances, disclosed APRs, and what the heck, some underwriting standards that take into account the ability to repay. This is the beginning of what could be a very hot summer for payday lenders.

Posted by: David Rothstein

Mythbusters: Payday Lending Version

Last year I analyzed four myths about payday lending that the Pew Charitable Trust’s “Payday Lending in America” project was able to disprove, in the first iteration of their study on borrowers. Their newest report “How Borrowers Choose and Repay Payday Loans: Payday Lending in America” goes into more depth, revealing a love-hate relationship between borrowers and high-cost, short term loans. The report tells a conflicting story of dependence, need, stress, relief, and any other emotion associated with finances that you could think of. Borrowing from the Mythbusters theme again, here’s the skinny on Pew’s new report.

(Editor’s Note: David wrote a blog post, when the first PEW report on PayDay loans came out last year.  For those who are interested in seeing how he dissects the fundamental myths behind PayDay loans, you can go here to check it out.  It’s worth the click)

Myth 1: Payday loans are mostly paid back.

Truth: There is some ‘truthiness’ going on here. Pew’s recent study finds that borrowers renew their loans or take out back-to-back loans in order to prevent defaulting. Only 14 percent of payday borrowers can repay their loans from a monthly budget. At some point, most borrowers inevitably default, require a cash infusion from family or friends, or use a tax refund (1 in 6) to pay off their loan debts.

Myth 2: Payday lending is an alternative for overdraft fees from checking accounts.

Truth: More than ¼ quarter of borrowers stated that payday loans caused their overdraft fees. The loan and overdraft fees are not mutually exclusive.

Myth 3: Borrowers think the terms are fair.

Truth: Again, there is some degree of truthiness about this. It is less about fairness but more so about ease of access, desperation, and perceptions. Some 55 percent of borrowers reported that loans take advantage of borrowers. What’s more, perhaps the most revealing finding is that 37 percent would borrow on any terms.

When people get desperate, it’s no surprise that they’ll do desperate things. The overall challenge with payday lending is that families lack income and assets to support themselves. As one borrower remarked, this relationship between borrower and loans is sweet and sour. Sweet when there is some immediate relief; but sour after the loan is made. Payday loans turn out to be a real problem for most customers, but the root here isn’t these terrible products. The root of the problem is the inability to earn income, set aside assets and build financially secure households. Fighting off the worst terms of the worst products is just a delaying measure until we can fix the structures and systems that aren’t serving the American people very well.

 Posted by: David Rothstein