A new study is strongly critical of the payday lending industry's tactics for building profits, and of the FDIC for its role in making it possible for the lenders to do business.
"Payday lenders use loopholes in state laws, rent bank charters, and offer sham "rebates" to get around state usury and small loan laws intended to protect cash-strapped consumers from predatory loans," stated Jean Ann Fox, director of consumer protection for the Consumer Federation of America. "States that try to protect vulnerable borrowers are being invaded by usurious lenders and banks willing to rent their charters."
The CFA has published a new report, "Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury," that documents the tactics used by payday lenders to evade state usury and small loan laws to market payday loans.
According to industry analysts, consumers paid up to $4.3 billion in 2002 to borrow about $25 billion from payday lenders, double the fee revenue in just two years. Fifteen states have not legalized small loans at rates that average 470% annual interest, while some other states have set loan limits that the industry seeks to evade, the CFA said, noting the industry has been seeing greater resistance at the state level.
Eleven of the 13 largest payday loan chains partner with ten state-chartered FDIC banks to make loans they cannot legally make on their own, the report adds, noting that more than 1,000 payday outlets in Texas use out-of-state bank arrangements to charge higher rates than Texas rules allow. North Carolina and Pennsylvania are overrun by payday loan stores despite state small loan laws that cap interest rates at up to 36% annual interest.
"Federal bank regulators put a stop to their banks partnering with payday lenders due to unsafe and unsound practices," Jean Ann Fox said. "Only the Federal Deposit Insurance Corporation permits its state banks to partner with payday lenders."
The FDIC adopted guidelines last July for payday lending by the banks it oversees but has yet to take action, CFA said, adding, "The FDIC even permitted a Federal Reserve member bank to switch regulators to continue its lucrative payday loan operations."
"Congress must put a stop to charter renting by federally insured banks," stated Fox. "States cannot protect their consumers if store front lenders can evade state usury laws by partnering with banks in South Dakota and Delaware that have no limits on interest rates."
The report describes new tactics to hide payday loans behind the "sale" of Internet access and phone cards with a "rebate" that is really a loan. Similar loans hidden as a sale of phone cards with a "rebate" are at issue in a Georgia enforcement case. A Georgia consumer was charged $1,755 for a $300 loan or $67.50 every two weeks for long distance cards that often didn't work.
The store advertised "Up to $500 Instant Cash," and was ordered by state regulators to cease and desist from making loans that violate Georgia usury laws.
