Despite 15 states putting a ban on payday loan lending, the industry is thriving. With nearly 12 million Americans turning to payday loans for help, there is no shortage of lenders whether online or storefront. In fact, the industry has found a powerful ally in some major banking institutions including Wells Fargo and JP Morgan Chase reports Pew Charitable Trusts, a Washington D.C. based think-tank organization aimed at improving public policy.
Payday loan lenders are getting savvy when it comes to working their way around state bans. By relocating their operations to states that allow payday lending they continue to do business. Some have even opted for taking their business offshore so they can avoid being subject to interest rate caps.
While lenders see an increase in business, banks have become a part of the process by allowing lenders to automatically withdraw payday loan payments from borrowers’ bank accounts. Fifty-eight percent of consumers who turn to short-term lending already have ongoing money problems and are desperate for quick cash. They borrow an average of $375 which is supposed to be paid back with their next paycheck but end up taking about 5 months to repay; the cost of finance charges?…$520.
This creates a cycle of automatic withdrawals in the lender’s effort to collect the principal loan amount along with interest and fees from the borrower. This is where the banks come in. They don’t originate loans but work with payday lenders allowing them to automatically withdraw payments for borrower’s accounts. Often times these lenders are withdrawing from accounts that are located in states where payday loan lending is illegal.
The problem comes when consumer’s are unaware that their bank is authorizing lenders to renew their loan and continue withdrawing money even after the customer has canceled them. In the event that a customer wants to stop payment on a payday loan withdrawal, they must notify the lender at least three days before the the lender goes to take the money out of the account. If proper notice isn’t given, the lender will automatically renew the loan and withdraw what is owed in interest. Federal law does allow for the consumer to stop authorized withdraws on their account but this process doesn’t happen as quickly as many think it will.
Banks seems to getting caught between payday loan lenders and borrowers. Account holders are upset because their accounts are still being debited for their payday loan payments even though they have requested a stop payment on automatic withdrawals, or they have requested that their account be closed all together. In the meantime, banks are authorizing lenders to pull from borrowers account regardless of if the money is there or not. To compound matters, customers incur extensive overdraft charges and bank fees when payday loan payments don’t go through.
The fight continues between states calling for stricter regulation in regards to banks and payday lenders allowing automatic withdrawals and the payday loan industry seeking legislation will implement a charter for the entire industry.