Payday lending — in which a customer is given a cash advance on his/her next paycheck — has traditionally been confined to largely unregulated non-bank lenders. However, the Minneapolis-St. Paul Star Tribune reported yesterday that payday lenders “have a powerful new ally in their quest for respectability: big banks”:
A few of the nation’s largest banks — including Minneapolis-based U.S. Bancorp, Wells Fargo & Co. of San Francisco, and Fifth Third Bancorp of Cincinnati — are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.
These banks are making a strong case for creating a Consumer Financial Protection Agency (CFPA) in a couple of ways. The first is that loans of this sort should come under some sort of regulation, even if they remain largely in the non-bank sector. Typical payday loans have interest rates of 400 percent or more. While not quite that high, the big banks are charging $10 per $100 borrowed, which translates into a 120 percent annual interest rate.
These exorbitant rates are what makes payday lending profitable — and ensures that the borrowers who use them have to keep coming back for more. As the Center for Responsible Lending found, 76 percent of payday loan volume (and $3.5 billion in annual fees) is due to “churning,” which is repeat borrowing by customers who paid off their loan, but because of the interest, require another loan before their next paycheck. Sky-high interest rates and the way in which loans of this sort are marketed and sold would come under the purview of the CFPA.
Second, as the Consumer Federation of America pointed out, the banks in question are “using their national bank charters to avoid state usury laws,” which in many states cap the amount of interest that can be charged for a payday loan. But as envisioned by the Obama administration, the CFPA would set a floor for regulation that would not preempt state law. The CFPA would ensure a minimum level of protection, but wouldn’t prevent states from rightly applying their own usury laws to national banks.
Legislation creating the CFPA, along with the rest of the administration’s regulatory reform agenda, is currently sitting in Congress, waiting to be acted upon. But while it sits, the banks are getting right bank to business, taking on record amounts of risk and finding creative ways to subvert interest rate restrictions. Incidentally, all three of the banks using these payday-type loans received TARP money, though U.S. Bancorp has since repaid the government. Wells Fargo still has $25 billion in TARP funds outstanding.