Weekly Briefing

It’s baaaack!!

Troubled Alabama bank tries to sneak payday lending back into North Carolina

It remains one of the most important victories for vulnerable North Carolina consumers in the last several decades. It occurred 11 years ago when the North Carolina General Assembly ended the state’s disastrous experiment with legal, storefront “payday lending.” It took another five years or so and a lot of litigation and administrative advocacy to clean up the mess, but as things stand today, North Carolina is essentially free from this addictive, predatory, wealth-sapping practice. People of low income and/or limited means still have many lousy products and services upon which to waste their money, but as things stand, legal, two-week loans that charge an annual interest rate of 400% are not among them.

Or, at least they weren’t. Recently, a financially-troubled Alabama-based bank with a tiny handful of branches in North Carolina – a bank that took billions of dollars in federal TARP funds – has added payday loans to the list of “products” it sells to cash-strapped customers.

The bank is known as Regions Bank and its website lists six branches in the state – two in Raleigh, two in Charlotte, one in Cornelius and one in Wilmington (though reports indicate that the Wilmington office is slated to close next month). The product is called a “Ready Advance” loan and its terms make it virtually indistinguishable from a traditional payday loan:

  • The maximum loan amount is $500,
  • Loans can be obtained online or at a branch office and there is no underwriting,
  • Full, balloon payment is due at the borrower’s next direct deposit (the loans are limited to direct-deposit customers), and
  • The cost to a borrower is 10% of the loan amount (for an APR of 365%) on the typical loan.

But how is this possible?

A number of obvious questions arise in response to Regions’ new “product” – most notably: How? How is it possible for the bank to make payday loans if state lawmakers outlawed the practice?

The answer is that while states like North Carolina are generally free to enforce their own usury laws against businesses they license and regulate, federal law renders them essentially powerless when it comes to banks chartered nationally or in other states. Regions is chartered in Alabama and therefore North Carolina law is likely preempted when it comes to regulating the products Regions sells.

But if this is the case, why now? Why haven’t banks been doing this all along?

Setting aside the occasionally helpful statements and actions of federal and state regulators that may have helped dissuade some banks at various times, the basic answer is this: Most respectable banks are simply too embarrassed or otherwise unwilling to engage in payday lending. They understand that payday lending is a predatory practice not dissimilar to loan sharking and simply choose not to take the risk of having their institution associated with it – regardless of whether it’s technically “legal” or not. Regions, however, has made the calculation that the potential profits from diving into a bottom-feeder business like payday lending outweigh the risks to its reputation.

As noted above, in an effort to make its product sound somewhat more highfalutin than a run-of-the-mill payday loan, Regions has cooked up the label “Ready Advance.” As also noted above, however, the terms are virtually indistinguishable and typical payday transaction. The effective interest rate is 365% APR and borrowers can take out several loans in a row. Moreover, unlike storefront payday shops that sometimes rely upon a post-dated check, Regions has an even greater ability to collect because it requires all borrowers to have a direct-deposit account with it. If direct deposits are insufficient to repay the loan within 35 days, Regions simply takes the funds anyway, even if this overdraws the bank account. The borrower is then charged overdraft fees on top of loan fee that drives the cost even higher.

Why this is bad news

Many experts have testified over the years to the predatory nature of payday lending, but this recent report from the Pew Center on the States makes the basic case clearly enough via four key findings:

  1. Twelve million American adults use payday loans annually. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest.
  2. Most borrowers use payday loans to cover ordinary living expenses over the course of months, not unexpected emergencies over the course of weeks. The average borrower is indebted about five months of the year.
  3. If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell personal possessions.
  4. In states that enact strong legal protections, the result is a large net decrease in payday loan usage; borrowers are not driven to seek payday loans online or from other sources.

In other words:

  1. Payday lending ain’t what its defenders make it out to be. As Nick Bourke of the Pew Center puts it: “Payday loans are marketed as two-week credit products for temporary needs. In truth, average consumers are in debt for five months and are using the funds for ongoing, ordinary expenses – not for unexpected emergencies”; and
  2. Those who do without (like the people in North Carolina) are better off. Put simply, the reason people turn to payday lending is because, generally, they don’t have enough money. And research confirms that, generally speaking, the last thing a person without enough money needs is a 365% interest rate loan.

What’s next?

Regions’ efforts to revive payday lending in North Carolina are troubling enough – especially for vulnerable and gullible Regions customers – but the real worry, of course, is that the practice will spread to banks with bigger footprints and lots more customers. Insider reports from consumer advocates indicate this may be a legitimate concern and that other, larger, more reputable institutions (including at least one prominent regional bank) are already considering moves to introduce their own versions of payday lending under similarly misleading labels.

In the coming weeks and months, North Carolina consumer advocates expect to launch a vigorous campaign to combat bank payday lending in the Tar Heel state – both before state and federal regulators and in the court of public opinion.

Their argument: North Carolina has already been down this road before. It was a disaster for consumers the last time we tried it and nothing of substance has changed in the interim. We ought not to get fooled again.

Let’s hope that thousands of average North Carolinians join them and that their efforts fall on receptive ears.