By Dwight Hobbes
Minnesota watchdogs are barking about what they assert to be “predatory” payday lending. A payday loan is a small, short-term, loan secured against a customer’s next paycheck. Upwards of 250 groups are accusing the banking system of exploitation, claiming U.S. Bank, Wells Fargo and other institutions are exploiting this tough economic climate to gouge people struggling to get by, profiting from excessive fees on these payday loans.
Lutheran Social Services, Minnesotans for a Fair Economy, SEIU Local 26, ISAIAH (Faith In Democracy), and TakeAction Minnesota are among the national, state and local organizations demanding bank regulators step in and stop banks from racking up loans yielding annual interest rates near 400 percent. The collective presented a letter to Richard Cordray, director of the Consumer Financial Protection Bureau, during a Town Hall Event at the Kaye Playhouse at Hunter College in New York City on February 22.
Kevin Whelan, communications coordinator at Minnesotans for a Fair Economy, states in a press release, “Wells Fargo Bank, U.S. Bank, Fifth Third Bank and Regions Bank are using a system developed by storefront payday lenders to engage checking account customers in a long-term cycle of high-cost debt.”
“Banks are taking money out of the pockets of some of our most [financially] vulnerable citizens,” says Whelan. He is referring to the working poor, of whom there are increasingly more than ever since the economic erosion of the middle class — “the people who can least afford to get ripped off.”
Needless to say, the issue is of concern to countless African Americans. “It’s not the wealthy that use payday loans. It is people who are struggling day to day to get by,” said Harrison Bullard, vice president of SEIU Local 26 and president of SEIU AFRAM Minnesota Chapter. “As the [“Predatory Payday Lending in Minnesota”] report states, people of color make up a disproportionate number of payday loan users. Our communities need more access to banking products on fair terms, not to be taken advantage of by high rates that trap people in a cycle of debt.”
Whelan stops short of calling banks’ payday lending practices legal loan sharking, but barely. “The rates they’re charging are actually illegal under Minnesota law. But, because they’re national banks, their argument is that they’re bound by a weaker set of regulations [under the] OCC [Office of the Comptroller of the Currency]. Apparently, it’s not a strong regulator, because, under [its] rules, it’s just fine to charge rates that are more than 200 and 300 percent.”
He states that the annual rate at U.S. Bank is 365 percent, and that at Wells Fargo it is 274 percent.
Consumers Union, publisher of Consumer Reports, advises, “Payday loans become a trap and are not used on a one-time basis as originally claimed by the industry. Consumers who must borrow money this way are usually in desperate debt. The high rates make it difficult for many borrowers to repay the loan, thus putting many consumers on a perpetual debt treadmill.
“Because they cannot repay the loan, they often extend the loan by paying the $17.50 per $100 fee several times over. Thus, many consumers end up paying far more in fees than what they borrowed. This kind of credit puts people in worse financial shape than when they started.”
Why take out a loan that is going to cost so much to pay back? Things happen, especially these days. You can fall behind on the rent and find yourself an eviction notice away from living on the sidewalk. So, you resort to a stop-gap measure.
“They’re trying to do it to get by over the short term,” Whelan says of those being victimized by such loans. “But, they actually end up further in the hole. And it’s the people at the bank [who] are making a fortune off of it. It’s huge percentages going from people who can least afford it to people who least need it. It adds up fast, and people end up in a cycle of doing it. It’s a predatory practice.”
The full title of the report by Minnesotans for a Fair Economy is “Payday Lending in Minnesota: How U.S. Bank and Wells Fargo Hurt Consumers with ‘Cash Fast’ Loans.” Part of it reads, “Wells Fargo and U.S. Bank make advances to their checking account customers who have direct deposit. The banks get repaid by deducting the entire loan amount plus fees when the customer’s next paycheck (or Social Security check) is deposited directly into their account.”
The report also reads, “Banks make the loans without regard to the customer’s ability to repay the loan, require the loan to be repaid in one sum within a short period of time, and allow repeat and continued use which can trap customers in a cycle of debt.”
Wells Fargo Media Communications Officer Peggy Gunn counters, “Our service is called Direct Deposit Advance, and it is only available to Wells Fargo customers who have an established consumer checking account with recurring direct deposits on a monthly basis. If they take advantage of the direct deposit advance, then, the payback is by the next direct deposit to close out the amount they [are] advanced. So, they can’t extend or rollover the advance, because [the debt is] automatically repaid with the next qualified direct deposit.”
This, reason dictates, precludes a customer digging him or herself into an ever-worsening financial hole. “It is designed,” Gunn adds, “to help customers through an emergency kind of situation. Like a car repair, a tire blows out. Something that is an unexpected expense. Just to provide them short-term credit needs.”
Gunn acknowledges, “It is an expensive form of credit. And it’s not intended to solve long-term financial needs.”
According to Whelan, “Payday lenders and banks that offer similar products under different names say they are meant to help people in one-time emergencies, but their profitable business is built on the simple truth that low- and moderate-income families don’t have a lot of money and are often in need of funds.
“When bank customers take out a ‘cash advance’ or payday loan, repaying that loan and paying fees takes much of the next check they deposit, so they need to take another loan to pay their bills and avoid bounced check fees,” says Whelan. “The Center for Responsible Lending [reports that], 15 percent of payday loan customers take out just one loan and bank payday customers were in debt for an average of 175 days per year.”
The U.S. Federal Trade Commission suggests, “The bottom line on payday loans: Try to find an alternative. If you must use one, try to limit the amount. Borrow only as much as you can afford to pay with your next paycheck — and still have enough to make it to payday.”
Dwight Hobbes welcomes reader responses to P.O. Box 50357, Mpls., 55403.