A recent New York Times article discusses the role that big banks play in payday lending. Payday loans are short-term, very-high interest loans that are banned in 15 states. However, to get around this, payday lenders set up internet-based operations in other states and foreign countries such as Belize, Malta, and the West Indies. The article projects that by 2016, internet loans will make up approximately 60% of total payday loans. While major banks such as JPMorgan Chase, Bank of America, and Wells Fargo do not make payday loans, they play an integral role in operating internet-based payday lending by allowing lenders to automatically withdraw payments from borrowers’ bank accounts, even in states where the loans are banned.
The article notes that the banks’ role in processing automatic withdrawals from their customers’ accounts often results in overdrawn accounts. Specifically, 27% of payday loan borrowers state the loans cause them to overdraw their accounts, which provides banks income in the form of overdraft fees. The article suggests that banks covet this overdraft fee income due to financial regulations that have limited debit and credit card fees, which cost banks billions of dollars.
The article states that a trade group, Online Lenders Alliance, supports legislation that would grant a federal charter for payday lenders and establish one set of rules for payday lenders to follow.
The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ role in online loans.
