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Major Banks Discontinue “Predatory” Loan Products
By Holly Testa, Director, Shareowner Engagement

Last April in this leadership blog, we discussed concerns surrounding the development of high interest, high fee loan products by several major banks as they made their entry into the lucrative payday lending market.

Payday loans are generally small loans are marketed to consumers as a vehicle to meet short-term cash needs, but the steep 225% to 300% annualized interest and penalty fees often lead to a continuing cycle of increasing debt that the people to whom these loans are targeted can ill afford. A 2013 report from Consumer Financial Protection Bureau found that banks’ payday loans keep customers in triple-digit debt during an average of seven months out of the year.

Wells Fargo, U.S. Bank, Fifth Third, and Regions Bank all announced plans in January, 2014 to discontinue these products after federal regulators issued a warning in late November, 2013 that the so-called deposit advance loans could potentially violate the Truth in Lending Act and other consumer-protection laws. Rules from the FDIC and OCC require the banks to determine if the borrowers can pay their debts, limit them to one loan per monthly statement cycle, and cannot grant a new loan until the previous one is paid off.

While it is certainly good news that major banks will no longer directly participate in these types of loans, the battle for fair lending practices is by no means over. The Justice Department is now investigating the indirect participation of banks in these lending practices—the banks that finance third-party payday lenders.

According to a recent New York Times article, payday lenders who work with third-party payment processors that have an account at participating banks are able to automatically deduct payments from customer checking accounts—even in the growing number of states where the loans are illegal. Banks reap large fees for this service, including lucrative overdraft fees.

Per the New York Times, “The Justice Department is weighing civil and criminal actions against dozens of banks… In the new initiative, called ‘Operation Choke Point,’ Justice is scrutinizing banks both big and small over whether they… enable businesses to illegally siphon billions of dollars from consumers’ checking accounts, according to state and federal officials briefed on the investigation.”

Is your bank enabling the business vultures known as payday lenders?

 

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

 

Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: February 24, 2014