| WASHINGTON
- November 13 - Payday lenders, thwarted by state regulators and the courts, are expanding
their use of partnerships with banks to make loans that violate state
usury laws, small loan rate caps, and even payday loan state legislation.
Rent-a-bank payday lenders seek to benefit from bank privileges despite
warnings from federal regulators and enforcement actions by state Attorneys
General, according to a new report by Consumer Federation of America and
the U. S. Public Interest Research Group.
"Big payday lenders
don't want to comply with state laws designed to limit their triple-digit
interest rates, so they are renting bank charters in a cynical attempt
to avoid state consumer protections," said Jean Ann Fox, Director
of Consumer Protection for CFA. "Check cashers, pawnshops, and payday
lenders are attempting the biggest bank powers heist of all times."
In a typical payday
loan, a consumer writes a personal check for $230 to borrow $200 for two
weeks ("until payday"). The Annual Percentage Rate (APR) on
this loan is 390%. At the end of the two-week period, the consumer often
extends the loan by paying the $30 fee to carry it for two more weeks.
Consumers who cannot cover the deposited check are faced with bounced
check fees from both the lender and the bank, added Ms. Fox.
"Predatory triple-digit
payday loans threaten vulnerable consumers in this economic downturn,"
said Edmund Mierzwinski, Consumer Program Director for U.S. PIRG. "We
urge Congress and the states to ban predatory financial practices such
as holding checks as ransom for fast loans."
The new report, "Rent-A-Bank
Payday Lending," surveys 235 payday lenders in 20 states and the
District of Columbia. It also analyses the status of payday lending laws
around the country and reports on the growing use of bank partnerships
by lenders.
Key Survey Findings
- Payday lending
is now a booming business, with 65 million transactions being made by
up to 24,000 large and small payday loan outlets. The industry estimates
that up to 10 million American households will pay $2.4 billion in fees
this year for two-week loans.
- Nineteen states
and two territories have laws that do not authorize loans based on checks
at triple-digit interest, while 25 states and the District of Columbia
have authorized payday loans. Another six states have no cap on charges
for credit, permitting payday lending without any state law limits on
fees or loan terms.
- The national average
APR for surveyed loans was 470%, with an average fee of $18.28 to borrow
$100 for two weeks. APRs quoted ranged from 182% to 910% and fees ranged
from $10 to $35 per $100 borrowed.
"It is obvious
that competition and state limits are failing to protect payday loan borrowers,"
Ed Mierzwinski said. "Over half the surveyed lenders in states that
cap rates are charging at or above the legal maximum."
- The most common
APR found was 390%, charged by 30% of all stores, followed by 520% charged
by 18% of all stores. Another 21% of stores charged APRs clustered between
442-459%.
- Consumers have
a hard time shopping for payday loans by price, since only 32% of lenders
disclosed a nominally accurate Annual Percentage Rate on charts or brochures
in their stores. Only 22% of stores disclosed both fees and APRs in
their stores.
- Over three quarters
of surveyed stores allow a consumer to renew or rollover unpaid loans,
either by paying the finance charge to extend the loan or accepting
a new check for another loan as soon as the old check was redeemed for
cash.
State Legislative
Status
The report summarizes
state legislative activity in 2000 and 2001. States are showing greater
reluctance to authorize payday loans with North Carolina allowing its
payday loan law to sunset in August. Other states that refused to pass
industry-friendly authorizing legislation this year include Alabama, Virginia,
Maryland, Oklahoma, New York, Georgia, Texas, and California. Only Florida
and North Dakota legalized payday lending in 2001. In the last two years,
Maryland and Colorado adopted anti-broker or loan arranger laws in order
to keep control over local companies that broker loans for out of state
banks.
Rent-a-Bank Payday
Lending
Pawn shops, check
cashers and payday lenders are attempting to claim the rights of banks
to charge rates permitted in the bank's home state. Despite warnings from
federal bank regulators, bank involvement in payday lending is growing
both in states that retain usury limits, such as Virginia and Indiana,
and in states that authorize payday lending such as Colorado and California.
Lenders that partner with banks usually charge higher rates, make larger
loans, or make repeat loans in violation of state laws. Rent-a-bank payday
lenders are facing state enforcement or class action litigation in Colorado,
Ohio, Maryland, Florida and Texas. The report details bank and payday
loan connections (See attached chart.)
Policy Recommendations
and Advice to Consumers
The groups urged the
following reforms:
- States should enforce
existing usury laws and small loan laws and enact anti-broker provisions
to keep state control over non-bank local companies. States that have
already adopted industry-friendly laws should amend their payday loan
laws to lower costs, prevent debt traps, and protect borrowers from
coercive collection tactics made possible by the holding of checks as
the basis for loans.
- Congress and federal
bank regulators should stop rent-a-bank arrangements and outlaw the
holding of checks drawn on federally insured depository institutions
as the basis for small loans.
- Banks, thrifts,
and credit unions should serve their account customers with fairly priced
overdraft protection and credit arrangements.
The groups urged consumers
in need of short-term cash to avoid extremely expensive payday loans,
and to instead, build up a savings next-egg to cover financial emergencies,
seek budgeting and debt management assistance from non-profit consumer
credit counseling services, and shop for credit based on both the dollar
finance charge and the Annual Percentage Rate.
"Consumers with
too much month at the end of the paycheck deserve better legal protection
against predatory lenders," Jean Ann Fox concluded. "Lenders
who misuse bank charters and who devise tricks and ruses to evade state
consumer protections must be stopped."
Copies of Rent-a-Bank
Payday Lending are available from CFA and USPIRG. The report will be posted
at the groups' web sites, www.consumerfed.org
and www.pirg.org.
The Consumer Federation
of America is a non-profit association of over 280 groups, with a combined
membership of over 50 million people. CFA was founded in 1968 to advance
consumers' interests through advocacy, research, and education.
U. S. Public Interest
Research Group serves as the national lobbying office for state Public
Interest Research Groups. PIRGs are non-profit, non-partisan consumer,
environmental and good government research and advocacy organizations
with members around the country.
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