Payday loans are short-term loans with triple-digit interest rates made to cash-strapped borrowers regardless of their ability to repay. It's a debt trap now practiced by a handful of big banks, including Wells Fargo Bank, U.S. Bank, Regions Bank, Bank of Oklahoma, Guaranty Bank and Fifth Third Bank. These institutions have decided that profits from what amounts to legal usury is worth the cost to their reputation. But federal regulators don't have to agree. Both they and Florida lawmakers need to step in to rein in all the state's payday lenders.
People generally know of payday lending through storefront operations. Florida has over 1,300 of them. Bank payday lending operates in essentially the same fashion. Borrowers have a checking or savings account at the bank, and when they need money to fix a car or for some other emergency expense they borrow $100 — a typical amount —as an advance on their next direct deposit to their account. Banks then pay themselves back plus high interest and fees after the borrower's next paycheck, disability check or Social Security check is automatically deposited. If the borrower doesn't have enough in their account to cover the full loan, the withdrawal is made anyway and overdraft fees may start piling up.
What most often happens is that after that debt is paid, borrowers frequently take out another loan, leading to a cycle of shouldering new loans. According to a report by the Center for Responsible Lending, the median payday borrower took out at least 13 loans in 2011 and over a third of borrowers took out more than 20. These loans carry annual interest rates that average from 225 to 300 percent for a typical loan term of 12 days.
Churning loans is considered the crux of the business model. In Florida, over 60 percent of payday revenue is generated from borrowers who take out 12 or more loans per year, according to a 2010 report prepared for the state Office of Financial Regulation.
In 2000, Florida put an end to triple-digit interest rates on car title loans where lenders would hold the borrower's car title as collateral. State law caps car title loan interest charges at 30 percent annually. But no similar consumer protection exists for payday loans. A 2001 payday loan measure authorized the industry to charge a maximum annual rate of 391 percent on a $100 loan for a 14-day period. Were Florida lawmakers to end payday loans in the state, it would save $250 million in predatory loan fees every year, according to the state report.
Other states have barred payday lending entirely or capped the interest rate at 36 percent. In 2006, the Military Lending Act was passed to protect active-duty military and their families from being financially exploited by payday lenders, limiting loans to a 36 percent maximum annual interest rate. But large banks can get around these federal and state consumer protections, and will continue to do so as long as the practice is lucrative and legal.
Federal banking regulators and the Consumer Financial Protection Bureau have the authority to shut down this practice. Florida lawmakers can do so at the state level. It speaks to the political power of the industry that so little action has been taken to eliminate debt-trap products that harm so many low-income Americans.