Payday Lenders Shred Consumer Safety Net

October 3, 2002
Jean Ann Fox, Consumer Federation of America, 202-387-6121

Washington, D.C.-Payday loan companies not only take a bite out of consumers' pocket books with loans that cost 470% annual interest and are due in full on payday. Payday lenders are shredding the consumer protection safety net meant to safeguard needy borrowers who have no bargaining power in the predatory small loan market.

Payday lenders took a bite out of state interest rate and usury protections by lobbying for safe harbor legislation in 27 states. Payday lenders rent bank charters in hopes of claiming the bank's right to export favorable home state interest rate laws. Federal bank regulators are cracking down on rent-a-bank misuse of bank charters as a safety and soundness risk to banks. This year, the Comptroller of the Currency ordered Eagle National Bank to stop making payday loans with Dollar Financial Group check cashers and filed charges against Peoples National Bank of Paris, TX.

 This has not stopped payday lenders. Check 'n Go has applied to buy Bank of Kenney, the smallest state bank in Illinois, in order to turn its payday loan outlets into bank branches. If the Federal Reserve and the FDIC approve this application, Check'n Go will undoubtedly claim the right to export unlimited interest rates from Illinois across the country.

 Payday loan trade groups hold out their voluntary "Best Practices" as a substitute for effective legal protection for borrowers. Trade groups can't enforce voluntary guidelines against their own members or against companies that refuse to be governed by them. We believe the "Best Practices" are more public relations than consumer protection.

  • "Best Practices" do not mention the high cost of payday loans, the threshold problem that makes payday loans so destructive to over-extended consumers. The industry supported a bill in Virginia this year that authorizes rates of 780% APR.

  • "Best Practices" promise to meet only minimum legal requirements, such as making disclosures required by the Truth in Lending Act and promising not to criminally prosecute consumers who fail to make good on checks written to get loans.

  • "Best Practices" permit lenders to roll over loans four times or the legal limit. An analysis of payday lender data from Wisconsin found that 79% of all loans were either roll-overs or taken out before the borrower's next payday. Payday lenders make their money from roll-overs. Data from North Carolina outlets show that borrowers who make 13 or more transactions a year with the same lender account for more than 50% of the fees collected. If the fee cap is $20 per $100, as CFSA has supported, four rollovers will result in a finance charge equal to the loan amount.

  • "Best Practices" promise that lenders will comply with applicable law, which is meaningless when payday lenders partner with out-of-state banks to evade state laws. After the Georgia Attorney General issued a ruling that the Georgia Industrial Loan Act applies to payday loans, Advance America and BankWest went to court to prevent the Industrial Loan Commissioner from examining their books. In Texas, only 40 payday loan outlets comply with state regulations while 895 locations partner with banks to evade state limits.

  • "Best Practices" promise a 24-hour cooling off period for loans, an empty gesture to borrowers who have a hard time paying back the loan on their next payday, much less paying it back the next day. Payday lenders will lend up to 100% of net weekly pay and do not ask about the borrower's ability to repay the loan. Notifying borrowers that payday loans are intended to be a short-term cash-flow tool does nothing to make these loans affordable, repayable, or fair.

The payday loan industry and its trade groups will not protect America's hard-working, over-extended consumers. Congress must reweave the small loan consumer safety net by enthusiastically supporting federal bank regulators in their efforts to stop rent-a-bank and buy-a-bank misuse of bank charters. Congress should take check holding out of the small loan transaction by enacting HR 1055 or set minimum standards that apply both to banks and to state payday loan laws by enacting HR1319.

Consumer Federation of America is a non-profit association of 300 consumer groups, with a combined membership of more than 50 million people. CFA was founded in 1968 to advance the consumers' interest through advocacy and education.