National Survey Shows Consumers Charged Triple Digit Interest Rates
Washington,
DC — 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."
