Bank Payday Lending Basics

Bank Payday Lending Basics

Big Banks Getting Intothe Bad Business of

Predatory Payday Lending

Center for Responsible LendingJanuary 2012

Rise of Bank Payday Lending

Wells Fargo – “Direct Deposit Advance”

US Bank – “Checking Account Advance”

Fifth Third – “Access Now”

Regions – “Regions Ready Advance”

What We’ll Cover

• How payday loans create a debt trap• How bank payday loans also create a debt trap • Which banks are making payday loans? Where?• How to find borrowers with bank payday loans • How bank payday lending impacts the financial services

landscape• Steps we can take to eliminate this abusive bank product

Abusive features of payday loans

Short-term loan = Long-term debt

• High fees

• Payment in full due on payday (balloon payment)

• Secured with signed personal check or electronic access to the borrower’s checking account

The Cycle of Payday Lending

Payday Loans are DESIGNED to Trap

Responsible Business: Regular Customer = Happy CustomerPayday Lending: Regular Customer = TRAPPED Customer

Bank Payday Lending

Another arrow in the quiver of predatory products.

How They Sell It

What Does It Cost?

Bank Payday Versus Non-Bank Payday

Bank Payday Loan

• 365% ($10 per $100 borrowed for 10 days)

• Due in full on next direct deposit

• No underwriting

• Typical customer indebted for 175 days/ year

Non-Bank Payday Loan

• 417% ($16 per $100 borrowed for typical 2-week cycle)

• Due in full on next payday

• No underwriting

• Typical customer indebted for 212 days/ year

How Bank Payday Lending Works

• Customer has direct deposit for their paycheck, social security or other benefits check

• Customer with direct deposit applies online or over the phone

• At time of the next direct deposit, bank repays itself the advance plus fee

175 days at 365% APR

You’d expect 400% interest loansfrom the corner payday lender,

not the banks.

• The average bank payday loan carries an annual interest rate of 365%.

• Bank payday customers are in debt an average 175 days per year.

• Nearly one quarter of bank payday borrowers are social security recipients.

Who’s Doing It?

And Where?

Bank Payday UnderminingConsumer Protections

Eliminate It – Why?

Problems with Bank Payday Lending:

• Triple-digit APR not justified, bank repays itself out of customer’s direct deposit.

• Loan terms designed to cause long-term debt. • Marketed as overdraft alternative, but:

One cash-draining product does not fix another and, Likely to increase rather than decrease overdraft problems.

• Likely increases the number of unbanked consumers.• Undermines state consumer protections.• Undermines military consumer protections.• Legitimizes abusive rather than productive credit.

Eliminate It – Why Now?

• Number of banks still relatively small, so banks more subject to regulatory and consumer pressure now.

• Number of banks is growing. Software consultant Fiserv promises banks the product will add a high fee source without taking away from overdraft and other fees.

• OCC’S recently proposed guidance is weak and, if finalized, threatens to legitimize product.

• Bank payday lending gravely threatens state consumer protections addressing storefront payday lending.

A Growing Threat

Fiserv, software consultant selling bank payday software:

• Promises that in two years, revenue from the [bank payday] product “will be greater than all ancillary fee revenue combined.”

• Says it’s “getting a lot of interest “ from banks: “The pipeline is extremely strong. We’ve had some very nice mid-tier signings over the last three, four months.”

The Federal Regulators

Office of the Comptroller of the Currency (OCC)• Supervises nationally chartered banks, like Wells Fargo and US Bank

Federal Reserve Board• Supervises state-chartered banks who are members of the Federal Reserve,

like Fifth Third and Regions Bank

Federal Deposit Insurance Corporation (FDIC) • Supervises state-chartered banks that are not members of the Federal

Reserve

Consumer Financial Protection Bureau (CFPB)• Supervises all financial institutions (whether nationally chartered or state

chartered) that have over $10 billion in assets (including Wells Fargo, US Bank, Fifth Third and Regions) with respect to consumer protection issues. In addition, writes rules that apply to all banks and non-banks, regardless of size.

What Are Advocates Already Doing?

• Raising Awareness

• Moving Money

• Reaching Out to Regulators

• Reaching Out to Banks

How Can You Help?

1. Identify individuals harmed by bank payday lending.

If you work directly with households facing financial distress, find out if they’ve gotten caught up in a bank payday loan.

2. Sign a letter to the bank regulators.

3. Send us links to your work – pictures, videos, articles, action - advocating for an end to this abusive product.

We’re documenting activity on bank payday lending around the country. Help us show the banks and the regulators how the public feels about predatory payday lending.

Finding Trapped Borrowers

Bank payday loans likely a hidden problem:

• No APR disclosure• Automatic direct deposit deduction• Don’t fall behind on this loan because bank takes its money first• Other fees may be seen as cause of account shortfalls.

When investigating stories, you may need to ask:

• The name of the bank.• The name of their advance product (eg., Direct Deposit Advance for

Wells Fargo)• To look at their bank statement.

Please share stories you hear about. CRL will provide a form for collection.

Take-aways

• Direct deposit advances reproduce the payday lending debt trap

• Banks are making payday loans across much of the nation, even where states have consumer protections.

• We can reverse this trend by working together.

Don’t Let Banks Legitimize Loansharking

Don’t let banks makepredatory payday lending

business as usualfor working Americans.

Q&A

Questions?Ask now or contact us later.

Rachel.Anderson@responsiblelending.orgRebecca.Borne@responsiblelending.org

www.facebook.com/CenterforResponsibleLending

@crlonline@noloansharking