In a recent
Just a few years ago, banks were making 200%-plus APR payday loans, which they euphemistically called “deposit advance products.” While deposit advances were marketed as a small-dollar, quick fix to a budgetary shortfall, they typically led to an expensive debt trap. These were payday loans, dressed up in a suit and tie.
In 2013, regulators rightly took
The data on this last era of bank payday loans showed that they are devastating for American consumers while posing serious risks to banks’ safety and soundness and their reputations.
These debt trap loans were based on the bank’s ability to seize the money from the customer’s account on payday, and banks did not consider whether the borrower could actually afford the loan. The bank only checked that there was enough money coming into the account to extract for itself the loan repayment and its sky-high interest. After the bank took its full loan amount and interest, borrowers were usually left without enough money left to pay for the necessities of life, such as housing, food and utilities. In order to make ends meet, borrowers were forced into a cycle of repeat loans.
Instead of helping them out, deposit advances pushed Americans further down a financial hole. Banks put deposit advance borrowers in an average of
As with payday loans from nonbank companies, deposit advances put borrowers at serious risk of a financial free fall. For instance, deposit advance borrowers were
Borrowers of these bank payday loans were also more likely to have taken out a nonbank payday loan, an indication that deposit advance was not an alternative to nonbank payday loans, but
While this was a
At the product’s peak, bank payday loans drained consumers of $500 million a year even though they were issued by “only” six banks — most banks didn’t want to get their hands on this dirty product.
Especially since the
A call to return to these loans and the premise of Mr. Hunt’s op-ed — that bank payday loans help people facing a budgetary shortfall and are the only place they could turn to — is fundamentally flawed. Military service members and the approximately 100 million residents of states without payday loans employ a variety of
For decades, no regulation has prevented banks from offering affordable loans, and indeed
To guard against the return of unaffordable bank payday loans — whether balloon payment or any new wave of installment loans — regulators should require banks to check a borrower’s ability to repay the loan, a process that can be streamlined but that must consider both income and expenses. Such underwriting has long been a basic principle of sound lending. Pricing must also be reasonable. Banks should serve their customers and not get back in the business of predatory payday loans.