On The Problem Of High Sum (1000 Dollars And More) PayDay Loan Costs To Consumers

Though depository institutions have the means to offer low-cost payday loan alternatives, the proliferation of fee-based bounce protection programs represents a significant impediment to competition. Some depository institutions are already offering high-cost payday loan alternatives in the form of fee-based bounce protection. Under these programs, banks and credit unions offer to cover customers’ overdrafts for fees ranging from $17 to $35 per overdraft. Though they are not identified and marketed as payday loan alternatives, fee-based bounce protection programs are functionally equivalent to payday loans when used by customers as a form of credit. When used on a recurring basis for small amounts, the annualized percentage rate for fee-based bounce protection far exceeds the APRs associated with payday loans. Banks and credit unions benefiting from overdraft fee income may not want to cannibalize this income by offering their customers lower-cost, small 1000 dollar credit options.

To promote competition and help consumers identify the lowest-cost credit product, the report recommends that the Federal Reserve Board impose homogeneous disclosure requirements on all functionally equivalent forms of small 1000 dollar credit. Specifically, the report recommends imposition of the same APR disclosure requirements on fee-based bounce protection programs that are applicable to payday loans and lower-cost alternatives such as checking account linked lines of credit (LOCs).

Perceptions of regulatory hostility also discourage banks and credit unions from offering low-cost payday loan alternatives. Many depository institutions view regulators as hostile to payday loan alternatives, though our research shows this is a misperception. In fact, our interviews with all five federal banking and credit union regulators revealed widespread consensus that low-cost, properly structured payday loan alternatives would be positive from a consumer standpoint and likely warrant credit under the Community Reinvestment Act (CRA). Though regulatory staff saw public policy benefits in the development of payday loan alternatives, significant outstanding issues remain regarding credit criteria, capital requirements, repayment structures, and safeguards against excessive recurrent use of such products. As a consequence, our report recommends the formation of a task force of senior bank regulators to provide guidance on these issues to depository institutions interested in offering payday loan alternatives. We also recommend that regulators become more proactive in publicly encouraging payday loan alternatives.

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On The Problem Of High Sum (1000 Dollars And More) PayDay Loan Costs To Consumers

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