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A PREDATORY MODEL that can’t be fixed: Why banks should be kept from reentering the payday loan business

By the Progressive Blog Policy Watch

[Editor’s note: In the new Washington, D.C. of Donald Trump, many once-settled policies in the realm of consumer protection are now “back on the table” as predatory businesses push to take advantage of the president’s pro-corporate/anti-regulatory stances. A new report from the Center for Responsible Lending (“Been there; done that: Banks should stay out of payday lending”) explains why one of the most troubling of these efforts – a proposal to allow banks to re-enter the inherently destructive business of making high-interest “payday” loans should be fought and rejected at all costs.]

Banks once drained $500 million from customers annually by trapping them in harmful payday loans. In 2013, six banks were making triple-digit interest payday loans, structured just like loans made by storefront payday lenders. The bank repaid itself the loan in full directly from the borrower’s next incoming direct deposit, typically wages or Social Security, along with annual interest averaging 225% to 300%.

Like other payday loans, these loans were debt traps, marketed as a quick fix to a financial shortfall. In total, at their peak, these loans—even with only six banks making them—drained roughly half a billion dollars from bank customers annually.  These loans caused broad concern, as the payday loan debt trap has been shown to cause severe harm to consumers, including delinquency and default, overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts, and bankruptcy.  Read more

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