A group of ranking Democratic Senators - led by Connecticut's Richard Blumenthal - this week urged federal bank regulators to crack down on banks that offer loan products that resemble payday loans in most respects except by name..
The letter, sent earlier this week, echoes concerns expressed recently by the Center for Responsible Lending in a letter to the Office of the Comptroller of the Currency (OCC) complaining about payday lending practices of OCC-supervised banks.Regulators discourage banks from offering payday loans. However, several banks have devloped short-term loan products that get repaid after an expected Direct Deposit is received.
"These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt," Blumenthal wrote in a letter addressed to the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC). Blumenthal was joined by Senators Richard J. Durbin (D-IL),Charles Schumer (D-NY), Sherrod Brown (D-OH) and Tom Udall (D-NM). A copy of the letter was distributed by his office yesterday.
Connecticut is one of 14 states that ban banks from making payday loans. However, Blumenthal argues that the products many banks offer look and act a lot like the payday loan products nonbanks offer. That is, banks deposit the loans directly into customer checking accounts and debits the loan amount and interest from subsequent Direct Deposits. Typically, if there are insufficient funds to repay the loan after 35 days, banks repay themselves nonetheless, leading to potential overdrafts and a cycle of debt.
In the letter to regulators, the Senators said the typical bank payday borrower takes out 16 such loans a year, and some take out as many as 20 or 30 loans in a single year. And they urged "meaningful regulatory action" that assures this end result.
"Bank payday loans increase the ranks of the unbanked by making checking accounts unsafe for vulnerable consumers, a result clearly inconsistent with a safe and sound banking system. And payday lending poses serious reputational risks to any financial institution," the letter states. "As the agencies responsible for the safety and soundness of the financial institutions you supervise, you are compelled to stop them from making payday loans and from preventing additional banks from beginning to do so."