WASHINGTON–A number of consumer groups are warning that a statement by five financial regulators, including NCUA, encouraging greater small-dollar lending during the coronavirus pandemic will only lead more people into the “trap” of payday lending.
As CUToday.info reported here, the five regulators urged “responsible” small-dollar loans be made “in a manner that provides fair treatment of consumers, complies with applicable laws and regulations, and is consistent with safe and sound practices.”
But the consumer groups, which include the national Consumer Law Center, the Leadership Conference on Civil and Human Rights, the NAACP, the Center for Responsible Lending, Americans for Financial Reform, and the Consumer Federation of America, said this is the “worst possible time” for the regulators to make such an announcement.
"This crisis will last longer than two weeks, and balloon-payment bank payday loans just leave a hole in the next paycheck when a family's financial situation will only be worse,” said National Consumer Law Center Associate Director Lauren Saunders. “Banks should not revive the so-called 'deposit advance product' payday loans they were making in 2013, which the CFPB found trapped consumers in debt."
‘Worst Possible Time’
In a joint statement, the groups said, “This is the worst possible time for banks to make predatory payday loans. Government regulators have opened the door for banks to exploit people, rather than to help them.
“Essential consumer protection measures are absent from this guidance. By saying nothing about the harm of high-interest loans, regulators are allowing banks to charge exorbitant prices when people in need can least afford it,” the statement continues. “They have also lent credibility to single balloon-payment structured loans, which have been shown to trap people in a cycle of repeat reborrowing and crushing debt.
“Banks should not take the bait of this terrible idea. Especially at a time when banks are receiving 0% interest loans from the federal government, bank loans should be fair and affordable – at annual rates no higher than 36% for small loans and lower for larger loans. We will be monitoring whether banks offer loans that help or loans that hurt.
“Around the time of the last recession, a handful of banks issued ‘deposit advances’ that put borrowers in an average of 19 loans a year at over 200% annual interest,” the statement concludes. “These bank payday loans disproportionately harmed the financially vulnerable and badly damaged banks’ reputations. Since 2013 when regulatory guidance warned against this form of credit, banks have mostly stayed away. We trust that they will continue to do so as they do not want to repeat mistakes of the past.”