WASHINGTON (3/22/13)--A report by the Center for Responsible Lending condemned some big banks' payday lending practices, and suggested changes to the payday loan industry that would move lenders toward the higher standards and practices already followed by credit unions.
The report, released last week, slams the products provided by six large firms and says regulators should take immediate supervisory and/or enforcement action to stop them. They are Wells Fargo Bank, U.S. Bank, Regions Bank, Fifth Third Bank, Bank of Oklahoma and its affiliate banks, and Guaranty Bank. CRL found that these payday loans carry an average annual percentage rate (APR) of 225% to 300%.
The report recommended that regulators:
Require that any small loan product be affordable without leading to a cycle of repeat loans;
Carry an effective APR of 36% or less;
Be underwritten based on an ability to repay the loan without taking out another loan shortly thereafter; and
Not require mandatory automatic repayment from the consumer's checking account.
The National Credit Union Administration currently allows federal credit unions to offer short-term small amount loans to their members as an alternative to predatory payday loans that are offered by other financial service providers. Federal credit unions may charge an interest rate that is a maximum of 10 percentage points above the established usury ceiling at that time. For now, this amounts to an interest rate ceiling of 28%.
A $20 application fee may also be charged. The loans may total as high as $1,000 and may last for as long as six months, and the loans cannot be rolled over.
Most credit unions offering payday loan alternatives also limit fees, provide member financial counseling, and encourage members to open savings accounts. They also in some cases provide incentives for members that switch to longer-term and lower-cost lending products.
The NCUA also is reviewing its small-amount, short-term loan rules to find ways to increase flexibility and enable more credit unions to engage in this form of lending.