Banks Interested in Payday Lending?
Michael Milner -editorial
The other week I saw an article featured in the Birmingham news from the associated press that reported major banks are getting into Payday Lending.
To say I was taken back some is an understatement. You see, those who are familiar with my background know that I ran the CRA program for a major bank holding company for 9 years and served for over 23 years with a Federal bank regulatory agency as a consumer compliance examiner and a regional community development manager. In those job functions I spent a lot of time designing products for our low and moderate income constituencies and making sure that our banks were being fair to all.
All banks have basic lending products that can serve customers that needs money quick and can pay it back quickly. I am talking about your basic single payment, installment and line of credit loans. Each of these loan products allows the customer the opportunity to pay back all the money within a short period if you don't need the contracted period, and in most cases, without penalty. So, my question is, why are some banks trying to get into this business?
Product Not Right for Banks
I understand that many of our banks are having a difficult time during this financial crisis and are looking for creative ways to generate income. I also realize that getting your money back with interest quickly to reinvest into additional loans would make more money for you at a faster rate. However, I say that this way of making money is not right for banks. You see, banks and credit unions are different from pay day operations in that their charter gives them the right to use the public's money to make money for their stockholders, but with that right, they have a responsibility to their communities they serve. Research has shown that loans from payday operations have been found to increase the odds that households will repeatedly overdraft and eventually lose their checking accounts. We all are aware of the many ways these loans are ruining the lives of many Alabamians and thousands across our nation as they find themselves spiraling deep into a financial abyss.
Targeting High Risk Population?
Are these banks that offer these products targeting the higher risk population and/or the low income population? I believe so. It would seem to me that most borrowers would like to have the lowest cost with the most convent terms for payback unless you have no other choice. High risk and low income individuals have fewer options for borrowing money and may look favorably to payday loan products.
Banks are usually structured with a relatively low amount of capital as it relates to its assets, requiring it to be conservative in its lending policies and practices. This will protect the stockholders and ultimately the depositors. The thought of banks getting into this business doesn't make a lot of sense. This is a high risk business.
Does Not Fit CRA
I applaud banks that are creative in structuring lending products to address the needs of our low and moderate income constituency in the spirit of the Community Reinvestment Act (CRA). A bank is examined and rated under the requirements of CRA to meet the credit needs of its communities. In some cases they can get additional credit for being innovative. In many instances, in offering these CRA products, higher risks are taken, but don't get them confused. CRA programs and products help to grow and empower our communities while pay day loans help to tear down and destroy it.
Not Called Pay Day Loans
The Center for Responsible Lending has been looking at these loans for a while and report that banks making payday loans, claim their product is different from those found in a payday loan store, but after examining them closer, conclude they are not. They are called "direct deposit advances" or "checking account advances". Attached is the link to the CRL report. Draw your own conclusions. I have drawn mine.
Recently, I wrote a letter to my regulator friends discussing much of what I had to say here and requesting that CRA credit not be given to banks that make these type loans. Our bank regulatory agencies are aware of these products and are looking at them closely.
I have confidence in our Alabama Banks and in our Bank Regulatory Agencies that they will see the big picture in all of this and make the right decisions on behalf of those in which they serve.
Just one man's opinion.