In a letter to Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Comptroller of the Currency Thomas J. Curry, U.S. Senator Richard Blumenthal (D-Conn.) called for immediate action to halt the unsafe and unsound practice of bank payday loans. Joined by senators Richard J. Durbin (D-IL), Charles E. Schumer (D-NY), Sherrod Brown (D-OH) and Tom Udall (D-NM), Blumenthal's letter sheds light on the abusive practice of bank payday lending, which traps vulnerable customers in cycles of debt and oppressive fee structures that last on average nearly half a year.
"These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt. I urge our federal regulators to follow the lead of states like Connecticut in halting this unsound banking practice and putting an end to these abusive loans once and for all," Blumenthal stated.
Bank payday loans are illegal in 14 states including Connecticut and cannot be offered to U.S. military personnel. However, a number of banks have recently begun to offer loans with characteristics that make them closely akin to non-bank payday loans. For customers with direct deposit of wages and benefits, banks will advance a customer's pay for a fee, ranging from $7.50 to $10 for every $100 borrowed. The bank deposits the loan directly into the customer's checking account, then automatically repays itself the loan plus a fee out of the subsequent direct deposit. If deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, potentially leading to overdraft fees. As a result, payday borrowers often find themselves in cycles of debt, remaining in that cycle for an average of 175 days per year. The typical bank payday borrower will take out 16 payday loans over the course of the year, with some taking out as many as 20 to 30 loans in a single year.
In the letter, the senators urge the Federal Reserve, FDIC and Comptroller of the Currency to stop federally regulated banks from engaging in payday lending and to prevent further expansion of payday lending before this predatory practice spreads.
"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 engaging in it," 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 to prevent additional banks from beginning to do so. We urge you to take meaningful regulatory action that ensures that no bank, regardless of its prudential regulator, structures loans in a way that traps its customers in a cycle of high cost debt. Our states' residents, and consumers everywhere, deserve better from our nation's financial institutions."
Senator Udall offered his support stating: "Responsible lending plays a vital role in our economic recovery and growth, but deceitful lending practices can trap hardworking families in an endless cycle of debt. Whether online or in-person, we need to remain vigilant in protecting working families from financial abuse and I gladly join Senator Blumenthal in preventing new predatory practices from spreading."
ConnPIRG Director Abe Scarr offered the organization's support to the effort, stating: "ConnPIRG joins Senator Blumenthal in his important effort to convince regulators that banks have responsibilities to the communities they are chartered to serve and to the taxpayers that bailed them out. Banks should offer consumers opportunities to build assets and savings rather than trapping them in high-cost, unsustainable debt."