Our View: Finally, banks are out of payday loan business

January 23, 2014 

A customer applies for a cash loan in Sacramento.


Big banks saw the writing on the wall and voluntarily ended an abusive practice before the federal government did. Consumers will benefit.

U.S. Bank, Wells Fargo, Fifth Third Bank, Regions Bank, Guaranty Bank and the Bank of Oklahoma had gotten into the business of high-interest payday lending – which they called such innocuous-sounding names as “direct deposit advance” or “checking account advance” or “early access now advance.” A lot of them were doing business through wholly owned subsidiaries.

Wednesday, Bank of Oklahoma became the last of them to announce it was getting out of the business, effective May 31.

Government pressure, long overdue, helped bring about the change.

First, the new Consumer Financial Protection Bureau came out with a definitive study last April clearly linking these bank practices to payday lending practices.

The typical “advance” of $350 would cost the borrower $400 in just two weeks, working out to an annual percentage rate of 391 percent. Most consumers ended up in a cycle of debt, taking out one loan after another, averaging 10 per year. Most also got hit with overdraft fees or penalties for having insufficient funds when the banks automatically took money out of their accounts.

Second, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in November imposed tighter restrictions.

So the banks wisely got out.

But the problem of storefront and online payday lending remains.

Sen. Jeff Merkley, D-Ore., has introduced legislation ( 3426) that would cap payday loan interest rates, as the federal government already does for payday loans to U.S. military personnel, and close loopholes on online and offshore payday lending sites.

Now that major banks are bowing out of the payday lending business, the next change should be a cap on what now are usurious interest rates.

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