FDIC Investigating Banks Offering Payday Loans

The Federal Deposit Insurance Corp. announced this week that it plans to open an investigation due to claims that American banks are now offering products that are similar to controversial payday loans. These payday loan dynamics have been in the federal regulators crosshairs for years because they target low income borrowers.

The FDIC is deeply concerned about these continued reports,

Martin Gruenberg, the agency’s acting chairman, wrote in a letter Tuesday to Lisa Donner, executive director of Americans for Financial Reform, a Washington-based advocacy group.

…I have asked the FDIC’s Division of Depositor and Consumer Protection to make it a priority to investigate reports of banks engaging in payday lending and recommend further steps by the FDIC,

the letter continued. This letter was due to complaints from more than 200 consumer advocacy groups that had contacted regulators to put a halt to efforts being made by several national bank chains, including Wells Fargo & Co., U.S. Bancorp, Regions Financial Corp. and Fifth Third Bancorp. They referred to the loans as “inherently dangerous products”. The charge was that the banks were “trapping their customers in long-term debt at 400 percent annual interest.”

Vicious Cycle

The problem is that many people can’t repay the loans when they come due. They will then roll the loans into a new one, due their next payday, while paying the interest on the current loan. This adds considerably to the costs that can easily result in interest charges of 300% or more over the course of a year.

“There are people who wouldn’t walk into a payday loan store but think that if a bank is doing it, it must be safe,” said Lauren K. Saunders, managing attorney with the National Consumer Law Center. “If you take a look at these products from a consumer protection standpoint, they raise serious red flags.”

A spokesperson for several of the country’s largest storefront payday lenders says banks and credit unions are simply cashing in because they know the payday companies are “doing something right”.

Short Term Loans

The FDIC has long since stated it supports and in fact encourages banks to offer small short term loans in a more responsible manner than what payday loan companies offer. Payday loans are short-term, small-dollar credits secured by postdated checks that lenders can cash when the loan falls due. The effective interest rates on such loans can reach 521 percent, according to the Consumer Financial Protection Bureau, which began its own investigation months ago.

Anxious to remain competitive, some banks are now offering these types of products that debit their already existing checking accounts.

At a time when banks are struggling for growth, it’s certainly an avenue they’re going to look at,

said Greg McBride, senior financial analyst at Bankrate. But he warned that the loans are risky for financial institutions because the default rates are high.

The biggest increase, surprisingly, is found at some credit unions. Currently, there are approximately 400 now are in the market, courtesy of changes in regulations that allowed an increase in the maximum interest rate, which went from 18% to 28%.

None of the banks currently participating in these types of loan products have commented on their practices.

CFPB is considering taking public comments as part of its own investigation.

Similar News

No Comments »

Leave a comment