Two hundred and fifty national, state and local organizations and individual advocates have asked bank regulators to stop banks from making predatory payday loans, which carry triple-digit annual interest rates of as much as 400 percent. On Wednesday, a New York consumer group presented a letter signed jointly by the groups to Richard Cordray, Director of the Consumer Financial Protection Bureau, as the CFPB seeks information on checking account practices in New York City. The Federal Reserve Board, the FDIC and the OCC were sent copies of the letter this morning.
The CFPB is collecting information on overdraft practices that cost consumers billions of dollars each year. The agency announced today it will examine the practice of reordering customer transactions to boost overdraft fees. It will also look at disclosures and marketing to see if they are confusing or misleading, and to see if overdraft practices disproportionately impact low-income and young consumers.
Another contributing factor to high overdrafts is bank payday loans. Consumer advocates across the country are asking the CFPB and three other bank regulators to put an end to this disturbing trend before it takes root.
Wells Fargo Bank, US Bank, Fifth Third Bank and Regions Bank are using a system developed by storefront payday lenders to engage checking account customers in a long-term cycle of high-cost debt. They market the loan as a short-term cash advance to customers who have their paycheck or benefits check deposited directly into their checking accounts.
Customers apply online, on the phone, or in person for an advance of a few hundred dollars. The banks pay themselves back by debiting the advance plus a fee on the next direct deposit. The fee is typically $10 per hundred dollars advanced, which comes to an annual percentage interest rate of 365 percent, based on the average 10-day term of the loan.
Storefront payday lending works the same way, creating a long-term cycle of debt that drives borrowers into deeper financial trouble. Though bank payday borrowers start out seeking simple short-term relief, bank they end up in debt an average 175 days of the year. Social Security recipients are especially vulnerable, making up one quarter of bank payday borrowers.
The groups ask the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation to stop predatory payday lending before it becomes business as usual in the banking system. NEDAP, a New York City-based economic justice resource and advocacy center, presented the letter to CFPB in New York yesterday.