Bank Deposit Advances Are Disguised Payday Loans Payments Source


In a recent editorialConsumer Bankers Association president Richard Hunt says bank payday loans were a service to customers and is arguing for them to be reset. The facts, however, show that while these loans generated enormous costs for the banks, they constituted a usurious debt trap for the bank customers.

Just a few years ago, banks were providing over 200% APR payday loans, which they euphemistically called “deposit advance products”. While deposit advances were marketed as a small dollar quick fix to a budget deficit, they generally led to a costly debt trap. These were payday loans, dressed in a suit and tie.

In 2013, regulators rightly took Actions this drives the most, but not at allbanks stop issuing these dangerous lump sum payday loans. It is important to note that these guidelines issued by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, along with the Federal Reserve’s prudential statement, allowed responsible credit offers to continue unimpeded.

Data on this latest era of bank payday loans has shown that they are devastating to American consumers while posing serious risks to the safety and soundness of banks and their reputations.

These debt trap loans were based on the bank’s ability to seize money from the customer’s account on payday, and the banks did not consider whether the borrower could actually afford the loan. The bank only checked that there was enough money in the account to extract the loan repayment and its exorbitant interest for itself. Once the bank took the full loan amount and interest, borrowers usually found themselves without enough money to pay for basic necessities, such as housing, food, and utilities. In order to make ends meet, borrowers have been forced into a cycle of repeated loans.

Instead of helping them, deposit advances pushed Americans even further into a financial hole. Banks place deposit advances borrowers at an average of 19 of these loans per year at over 200% annual interest.

As with payday loans from non-bank companies, deposit advances put borrowers at serious risk of financial free fall. For example, deposit advance borrowers have been “Much more likely to overdraw their accounts” – resulting in expensive overdraft fees – and “were seven times more likely to have their accounts debited than their counterparts who had not taken [deposit] advances.”

The borrowers of these bank payday loans were also more likely to have taken out a non-bank payday loan, indicating that the deposit advance was not an alternative to non-bank payday loans, but simply an imitationcreating more unaffordable debt.

While it was a milking cow for short-term banks, prudential regulators have long warned that the characteristics of this type of credit posed a threat to the security and soundness of businesses. Bank payday loans have seriously damaged the reputation of businesses. Contrary to what Hunt claims, members of congress weighed in, urging regulators “to end predatory bank payday lending.” Negative Press articlesthe indignation of Community groups and “Move your money” campaigns added to the headaches of bankers.

At the height of the product, payday loans drained consumers $ 500 million a year, even though they were issued by only “only” six banks – most banks did not want to get their hands on the product. dirty.

Especially since the image of the financial industry in 2019 is still under the shock of the crash of 2008, restarting the bank payday would be unwise.

A call to reverse these loans and the premise of Mr Hunt’s editorial – that bank payday loans help people with a budget deficit and are the only place they could turn to – are fundamentally wrong. Military service members and the nearly 100 million state residents without payday loans employ a variety of strategies to fill a cash flow shortage. Surveys and studies show that these Americans use a range of methods, credit and non-credit, to manage their finances, including payment plans with utilities, credit cards, pawn shops, financial aid. from a local nonprofit, loans from religious institutions, building savings and income, and transforming to friends and family. Not all of them are ideal, but they are all much better options than payday loans.

For decades, no regulations have prevented banks from offering affordable loans, and credit cardincluding risk cards, are widely available for those who can afford more credit. Secured credit cards encourage savings and build credit capacity – these should be expanded.

To guard against the return of unaffordable bank payday loans – whether it’s a lump sum payment or any new wave of installment loans – regulators should require banks to check a borrower’s capacity. to repay the loan, a process which can be streamlined but which must take into account both income and expenditure. . Such an underwriting has long been a basic principle of strong credit. The price should also be reasonable. Banks must serve their customers and not get back into the business of predatory payday loans.

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