Community Groups across the country, including the Illinois Asset Building Group (a project of Heartland Alliance), have been fighting the payday loan industry. We call them sharks. They’re a predatory industry. An industry outside of mainstream banks and other financial institutions.
But what if we were wrong?
Several major banks, and some credit unions, are now offering a product that looks, sounds, smells, and feels like a payday loan. Banks are now loaning their customers $100 with a fee of $7.50. That’s an annual interest rate of 261%. Sure, it’s lower than many payday lenders but it is still significant.
The American Bankers Association has tried to defend these programs, arguing that “direct deposit advance programs enable customers to live within their means by permitting them to manage the timing of the receipt of those means.” However, these are loans that appeal to the most vulnerable – to those most likely already caught in a cycle of debt.
Even states that have passed an interest rate cap are not safe from these products. In Maryland, advocates passed a 33% interest rate cap on small dollar loans yet their law would not extend to major banks.
While advocates at the state level continue to push for tighter regulations and close existing loopholes, the federal government has done little to regulate this growing industry:
- The new Consumer Financial Protection Bureau will not have the authority to cap interest rates.
- The Office of the Comptroller of the Currency, while concerned about banks that steer customers on Social Security towards these products, issued unspecific guidelines that about how the banks should regulate this activity.
- The FDIC has advised the banks it oversees not to keep customers in this high-cost debt for more than 90 days of the year. But on average, bank payday loan borrowers are caught in this cycle for 175 days.
Here in Illinois, IL People’s Action (IPA) is building a movement against payday lending in their community. You can join their efforts through their Cap36 campaign.