Washington state has taken some steps to curb excesses in the payday loan industry, but the industry keeps evolving. According to the Center for Responsible Lending, several nationally-chartered mainstream banks are now offering their own version of payday loans – complete with high fees and short-term balloon payments similar to those that cause the typical payday borrower to become trapped in long-term debt:
Wells Fargo, US Bank, Fifth Third, Regions, and Guaranty Bank’s deposit “advance” loans are structured just like loans from payday loan stores – carrying a high-cost combined with a short-term balloon repayment. Research has long shown that these loans trap borrowers in a cycle of expensive long-term debt, causing serious financial harm to borrowers, including increased likelihood of bankruptcy, paying credit card debts and other bills late, delayed medical care, and loss of basic banking privileges because of repeated overdrafts.
Further, payday lending by banks undermines state law in the states that have prohibited or imposed meaningful restrictions on payday loans in recent years, or that have never allowed payday loans to be part of their marketplace. It also undermines provisions of the Military Lending Act aimed at protecting service members from payday loans.
In their 2010 report, the Center outlines how paydays loans from banks promote overdrafts (and more debt); do an end-run around interest rate caps set by states (like Washington); undermine federal legislation aimed at protecting military servicemembers; and disproportionately impact communities of color.
More than 250 policy and community organizations are calling on federal banking and financial regulators to “move quickly to ensure that payday lending by banks does not become more widespread, and to ensure that those banks currently making payday loans stop offering this inherently dangerous product.”