This week William Isaac, chairman of Fifth Third Bancorp (FITB), published a piece here defending payday loans and expressing concern about regulatory crackdowns on payday lending. This is not surprising given that—despite sharp regulatory warnings and widespread public opposition—Fifth Third may soon be one of only two banks in the nation that makes payday loans. Along with Regions (RF), Fifth Third appears to be attached to loans with triple-digit interest rates that mire people in debt. The banks insist on referring to these loans as "deposit advances," but they are designed to function just like other payday loans.
As Isaac notes, many American families are living paycheck to paycheck. He claims that this means they need access to short-term credit, and that payday lending meets this need. But he is wrong; these loans are not short-term at all. When cash-strapped borrowers take out a payday loan, their next paycheck may be enough to repay the lender, but it doesn’t leave enough to cover necessities, such as rent or food. Too often, the borrower must take out another loan and pay yet another fee, and the cycle of debt begins. Payday loans quickly turn into long-term, high cost, loans that borrowers cannot escape.
The debt trap nature of payday loans is not theoretical; study after study shows it is all too real. Recent research by the Consumer Financial Protection Bureau found that the median borrower took out 10 payday loans from a single storefront lender during one year, and spent 199 daysof the year in payday debt. These findings were generally consistent with other studies by the Center for Responsible Lending, my organization; the Pew Research Center; the Center for Financial Services Innovation; and reports by the largest payday lender in the country, Advance America.
To make this financial quicksand trap even worse, these loans typically are given in rapid succession, with the borrower paying excessive fees multiple times to continue to support the original extension of credit. And they lead to a cascade of bad financial consequences, such as increased likelihood of overdraft fees, delinquency on other bills, delaying medical care, and even increased likelihood of involuntary bank account closure and bankruptcy.
Particularly galling is that one in four bank payday borrowers are Social Security recipients. Borrowers on a fixed-income are especially at risk of getting mired in these loans.
Over the last decade, state and federal policymakers have taken numerous actions to curb payday lending. Today 22 states prohibit or significantly restrict payday loans. Congress determined that payday loans were a threat to military readiness, and banned lenders from making payday loans to members of the military or their families.
The banking regulators acted throughout the early 2000s to address safety and soundness concerns caused by banks partnering with storefront payday lenders to circumvent state laws. And in April this year, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed guidance to address central problems with bank payday lending.
Unlike the OCC and FDIC, the Federal Reserve has not proposed explicit requirements for the banks it supervises. However, it recently issued a statement emphasizing the "significant consumer risks" posed by payday lending and concerns about banks making repeat loans to borrowers. Fifth Third is one of two banks supervised by the Federal Reserve that make payday loans; the other is Regions. By continuing to make these loans, Fifth Third and Regions are not only putting their own customers at risk, they also appear to be ignoring a warning from their own regulator.
Data about payday loans, whether made by banks or storefront lenders, point to patterns of long-term indebtedness and loan churning that undermine economic security. The bottom line is payday loans are a defective financial product, and the CFPB should issue rules that would put billions of dollars back in the pockets of families who could really use that cash.
Michael Calhoun is the president of the Center for Responsible Lending.