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It’s not the only hand banks have in the payday world. A number of banks, including Wells Fargo and U.S. Bank, make expensive payday loan-like deposit advances to customers, products that bank regulators are now cracking down on. Banks also facilitate fast-cash loans as most online borrowers elect to have payday lenders deposit money directly into their checking accounts, and collect payments from the account, said Tom Feltner, director of financial services for the Consumer Federation of America.
Some borrowers have faced challenges with their banks when they’ve tried to revoke that authorization and stop collection, Feltner said.
Industry supporters argue the fast-cash industry helps millions of people bridge unexpected shortfalls and make ends meet, and that triple digit APRs are justified by the increased risk. The market has flourished, particularly online, despite mounting regulation.
But there is mounting research backing up what consumer advocates have argued for years — that payday lending too often traps borrowers in unaffordable repeat loans they can’t repay. The Consumer Financial Protection Bureau last month issued a report on payday loans concluding that they may be marketed as short-term fixes, but a sizable number of people take out repeat loans because they can’t fully repay an earlier one.
Minnesota, considered a hybrid state when it comes to regulating short-term lenders, limits payday loans to $350 and caps the annual percentage rate on a two-week $100 loan about 390 percent, according to the Pew Charitable Trusts.
There’s nothing illegal about the credit facilities payday lenders have with banks, Rust said, and they don’t threaten bank stability. But the Office of the Comptroller of the Currency (OCC), which regulates many of the banks involved, could rein in the payday industry if it pressured banks to exit, he said.
Liz Ryan Murray, policy director at National People’s Action in Chicago, which published a report about bank funding of payday lenders a few years ago called “The Predators’ Creditors,” said her group has provided the information to bank regulators in meetings. The basic reply, she said, has been “We can’t really tell them where to put their money.”
She said she hopes the actions federal bank regulators took recently to clamp down on the deposit advances banks make “is a sign that attitude in changing.”
An OCC spokesman said the bank-payday funding relationship “is an issue on the radar.”
Jennifer Bjorhus • 612-673-4683