The contentious discussion around the collection of short-term advances often referred to as "bank payday" may soon be winding up, as the comment period for new rules proposed by the FDIC and the OCC on deposit advances end tomorrow.
Oklahoma (BOK Financial) (Fast Loan) and Guaranty Bank (Easy Advance). In each case, the product gives an existing customer the option of taking an advance against their next direct deposit. Doing so comes at a high price. Bank are charging between 75 cents and one dollar for each ten dollar increment.
It is difficult to find a formula to estimate the APR for these products, as the term ends as soon as a borrower's next direct deposit hits. For people that get paid twice a month, it is hard to imagine a scenario where the term is longer than 14 days. Most of the banks give a customer 35 days, but after that some charge overdraft fees on top of the initial transaction costs. One bank even charges 21 percent interest on top of its one dollar for every ten fee. Suffice to say that the APR could be anywhere between 75 and 700 percent.
In any case, there are many states where an interest rate at any point in that range would exceed usury caps.
The OCC regulates four of those institutions. The others - Fifth Third and Regions - are both under the purview of the Federal Reserve. The Fed is silent on the question. The FDIC's interest is probably more about the future: their final rule will establish a precedent for any possible entrants.
The CFPB published a white paper in April that reported results from a sample of payday loans (online and retail) and from a smaller sample of deposit advances. It is rich paper with lots of interesting datapoints:
About payday loans:
- 48 percent of payday loan users made more than 10 transactions during the preceding 12 months. Repeat use is the norm. Only one in seven payday consumers used two loans or fewer over the course of the year.
Data on deposit advances revealed that customers did not differ very much in how they used the products offered at retail banks:
- One in four deposit advance borrowers drew more than $6,000 over the twelve-month period in question, and one is seven drew more than $9,000. In most cases, this would amount to fees of $600 and $900, respectively.
- Among checking accounts with deposit advances, the median number of draws was eight. Amazingly, those that drew more than $9,000 did so by utilizing the product 19 times (median).
- Although the banks will assert that it is not possible to "roll over," the CFPB found that borrowers were indebted (median) for 112 days or 31 per year.
The mean payday loan size was $392, whereas deposit advances tended on average to be for sums of about $100 more.
It is easy to submit your own comments here.
This is not entirely an example of a battle being waged between banks and consumer advocates. Recently the mainstream press has begun to pay more attention to the issue. I spoke with the portfolio manager of a large socially-responsible investment fund. He indicated that his firm was going to disinvest from several of the banks that were offering this product.