It’s not been too long ago that Bank of America found itself in hot water over an announcement that it would be imposing a $5 debit card usage fee for its customers that didn’t have massive deposits with it. Many recall the outrage that the bank would stick it to its middle class customers who likely could least afford more bank fees. In fact, so outraged were hundreds of thousands, that they not only began ditching their big banks for local credit unions, but it also spurred the Occupy movement that continues today.
And now, it seems banks are looking for ways to increase their bottom lines again; this time, though, it’s bordering on infuriating for some. As many know, the nation’s big banks have jumped into the payday loan sector and they’re jumping in with their eye on the massive – sometimes up to 300% – profit lines.
It’s important to understand the players in the game. Those consumers who turn to these financial products are often at the end of the line when it comes to their options. Too many times, these consumers are against the wall with a sick child, a flat tire or a utility bill that’s going to be disconnected. They’re days away from their paydays and they’re desperate. The average consumer who uses payday loans took out 13.5 loans in 2011. They also spent more than half of that year incurring different fees associated with the loans, which by the way, were designed to be a short term solution. In a perfect world, these loans would serve their purpose and the consumers would be able to pay them off without having to renew the loan every week or every two weeks. That simply doesn’t happen
Consumers Paying High Price
And the costs are high. It often ends up costing these consumers hundreds of dollars, if not thousands, before they’re able to break free from them. The fees can range from $7.50 to $10 for every $100 borrowed. Always the APR, when one sits down to do the math, are in the triple digits and on average equate to about 225%. They can go as high as 300%. The lifespan of one of these loans is twelve days, meaning the consumer signs a contract that he will be able to repay those funds within a couple of weeks. When that doesn’t happen, they can pay the fees and “renew” the contract. They don’t receive any further money, but once they pay that weekly or bi-weekly fee, the company or bank has just increased his own profits.
When you look at these loans from a historical perspective, it’s consistent to the terms offered, say, three or four years ago, with one exception being the interest, which in 2010 was on average around 360%. The rates have come down, but there’s simply no regulation.
The Banks Want In
And now, the banks are getting in on the deal. Remember, these are the same banks that millions can’t access all of the bank’s services because they are underbanked in this country, yet these banks are more than happy to call them customers provided they’re bringing in the big bucks. The banks insist their goal is to provide a short term financial solution for those who are in desperate need of money for those types of emergencies that can’t wait until payday, but they’re also doing little, if anything, to help those customers avoid the traps.
And here’s a bit more irony. Those borrowers who take out these loans are far more likely to incur overdraft fees, too. That means the short term loans continue to cost them big bucks. It’s also estimated that a quarter of payday advance users are social security recipients. If there’s any good news on this front, it’s that there seems to be fewer banks jumping into the market. Still, some of the nation’s biggest banks do offer them, including Wells Fargo, Regions and Guaranty Bank, just to name a few.
The banks continue to sing the praises of these costly loans, and in fact, some encourage consumers to choose these to cover overdrafts. It’s believed a full two thirds of those who use banks as their payday loan company of choice have also incurred overdraft fees as a result of using the service.
Too many times, those who are underbanked become unbanked because the overdraft fees begin to pile up. It’s a vicious cycle that no one is telling these consumers about. In fact, some recent findings about payday loan software show that these products further exacerbate an already bad situation because of the NSF fees. Ultimately, the checking account is usually closed. The problems have worsened to the extent that both the CFPB and FDIC have expressed concern about banks going into the payday lending business. For many, it feels too much like a conflict of interest.
Last year, the OCC, before lawmakers, testified that these are unsound and unsafe for consumers and that they “trap” consumers in these cycles of one transaction after another and it results in “unsustainable debt”. There’s no one at the banks or payday lending companies that are stepping up and educating consumers to the potential problems. The high fees continue to stack up. As a result, there are new recommendations being made and include the option for installment loans over, say, 90 days. This still provides a short term loan product but it better insulates consumers against these costly fees being repaid every two weeks.
Further, better pricing should be put into place and some say it shouldn’t be higher than 36%. Again, it still allows for a nice profit for the companies and banks, but it doesn’t become an overwhelming trap for those who use the products. Efforts need to be made to ensure the short turnaround time was realistic for each individual consumer and his situation. Finally, it’s suggested that these loans not be tied to the consumer’s checking account.
Will these efforts come full circle and become law? It’s going to be tough. Remember, the banks are quite powerful and as a result, they have the backing to make things very difficult for lawmakers. You can be sure they’ll pull out all the stops.