By Trisha Marczak
The battle over payday loan operations is growing, as America’s largest banks engage with the service, providing the link needed to debit accounts, even in states where payday loan operations are banned.
The Federal Insurance Corporation, along with the Consumer Financial Protection Bureau, are looking into the banks’ cooperation with online payday-type loans, according to a recent New York Times Report.
The link between banks and online payday loan services in states where the industry is banned raises a question for the banking industry, which is essentially aiding — and making money — off an industry that has been deemed by government officials to be unethical and illegal.
“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, told the Times.
Payday loans provide borrowers with high-interest rate paycheck advances, often luring them into a system of payday loan renewal, without full understanding on the part of the consumer. As noted by the New York Times, borrowers attempting to halt their banks from working with payday loan companies to withdraw funds are not always satisfied with the results, despite the fact that federal law claims customers do have the power to stop the automatic withdrawal.
The practice has already been banned in 15 states throughout the country, with legislatures recognizing the downward spiral it creates for those struggling to make ends meet. Twenty-two states in 2012 at least considered a ban on the industry, according to the National Conference of State Legislatures.
On Jan. 2, 2013, five prominent members of Congress, including Sen. Charles Schumer (D- New York) penned a letter to Federal Reserve Chairman Ben Bernanke, requesting that financial institutions supervised by the Fed from engaging in payday lending, calling it an “unsafe and unsound practice.”
“Your agencies have a long history of appropriately prohibiting their supervisee banks from partnering with non-bank payday lenders to facilitate evasion of state laws restricting payday loans,” the letter states. “But several of your largest supervisees are currently making payday loans directly to their own customers.”
The issue now is how to handle online operations in states where the industry is banned.
While only 15 states now ban the industry, the trend among legislatures is one that is increasingly favoring the consumer over the lending company.
Organizations like the Neighborhood Economic Development Advocacy Project, which works to promote financial justice within New York City’s low income areas, are gaining ground. Its mission statement is one built around promoting thriving, healthy communities — which, it argues, cannot be done with “discriminatory economic practices.”
More than 25 percent of all borrowers using payday loan services report overdrawing their accounts as a result, according to a Pew Charitable Trust report. For banks partnering with loan operations, this provides yet another avenue to make money — often from their most vulnerable customers.
That same Pew report indicates that 58 percent of payday loan borrowers already have a hard time meeting monthly expenses — and only 14 percent can actually afford to repay the “average” payday loan.
“These data help explain why most borrowers renew or re-borrow rather than repay their loans in full, and why administrative data show that 76 percent of loans are renewals or quick re-borrows, while loan loss rates are only 3 percent,” the report states.
While those in the most vulnerable positions are carrying the burden of statistics, payday lending services are fighting back against state bans — not by lobbying states individually, but by seeking federal legislation that would provide legal framework to continue.
The Online Lenders Alliance, a trade group, is promoting a federal charter for payday lenders, according to the Times. It’s an effort to keep the industry alive and thriving, at the expense of those hurting the most.