We are involved in a series of class-action cases against payday lenders seeking to get money back for their customers. So far, three companies have settled, and we have recovered a total of $43.75 million for more than 364,000 class members.
What’s wrong with bank payday loans?
Bank payday loans create a debt trap, just like other payday loans. Rather than solving a financial crisis, they sink the borrower into a deeper financial hole. Center for Responsible Lending research shows:
- The average bank payday loan costs 365% annual interest.
- Bank payday customers are in debt an average 175 days of the year, with an average 16 transactions.
- Nearly one-quarter of all bank payday borrowers are Social Security recipients, who are 2.6 times more likely to have used a bank payday loan than bank customers as a whole.
What features made these payday loans abusive?
Storefront and bank payday loans share the same abusive features.
- Short loan term: Center for Responsible Lending research shows that bank payday loans are repaid on average in 10 days, an even shorter loan term than other payday loans, which are typically repaid in about 14 days.
- Very high cost: The Regions payday loan fee is $10 per $100 borrowed. Though this fee is lower than the typical fee for storefront payday loans, the effective cost is equivalent. This effective cost for loans is measured as the annualized percentage rate or APR, and it takes into count how long you borrow the money. Paying $10 per $100 to borrow money for a year is very different than paying $10 per $100 to borrow money for just 10 days. The average bank payday loan carries an annual interest rate of 365%.
- Super lien on the borrower’s bank account: The bank and the payday lender get their money first, even before the borrower gets access to his paycheck, through a live check, an ACH authorization, or the right to take funds out of the next direct deposit.
- Loan flipping leads to debt trap: When the borrower repays his payday loan, he is left with a big hole in his paycheck. Too often, payday borrowers are forced to take another high-cost loan before their next payday, just to keep food on the table and stay current on their other bills.
- No underwriting: The payday lender does not underwrite the loan to determine if the borrower can afford to repay the loan without re-borrowing. Instead, the lender looks to see if the borrower has sufficient direct deposits to repay the loan, even if repaying the loan leaves them without enough money to make it until their next payday.
What can our NC General Assembly do to stop this high cost lending?
The NC General Assembly has already spoken in opposition to payday lending by making it illegal in 2001. They have repeatedly upheld our North Carolina small loan interest rate and fee limits, which regulate loans of $10,000 or less. Interest rates on these loans are capped at 36%. The annualized interest rate (APR), which includes the cost of fees and interest, can go as high as 54% on very small loans.
Bipartisan efforts have kept payday loans illegal in North Carolina. In recent years, payday loans by Regions Bank were carrying triple-digit interest rates that exceed North Carolina’s usury limits.
Bank payday loans are marketed as a quick, easy way to meet a sudden need, and they must be repaid at the borrower’s next payday. But the interest rate is so high, and loan is due so quickly, that most cash-strapped borrowers have trouble repaying. Instead, they take out another loan to repay the first, and end up in a long and costly debt trap.
- Bank payday loan customers are in debt an average 175 days of the year.
- The average bank payday loan carries an annual interest rate of 365%.
- Customers of payday loan shops pay more overdraft fees than non-borrowers and are more likely to lose their bank accounts.
In 2001, the North Carolina legislature took a clear stand against payday lending, through a successful bipartisan effort to keep payday lending out of our state.
- From 1997 to 2001, North Carolina exempted payday lenders from the state’s usury limits. The results were so harmful for NC families and military servicemembers that in 2001 the state legislature ended the experiment, deciding not to permit payday lending in the state.
- The NC Commissioner of Banks and Attorney General eliminated the last of the payday storefronts, and North Carolina has been free of payday loan shops since 2006.
Out-of-state Regions Bank is flouting our law and making payday loans in North Carolina.
Six years after North Carolina succeeded in ridding our state of payday lenders, Alabama-based Regions Bank is using an arcane provision of the banking laws to make payday loans here. This is just wrong.
- NC taxpayers helped bail out Regions Bank in 2008 (Regions took $3.5 billion.)
- Regions should respect our small-loan laws and stop making loans that exceed our usury limits.
- Regions “Ready Advance” loans are as bad as storefront payday loans.
- Loan amounts can be up to 50% of the customer’s semi-monthly direct deposits, up to $500 (the amount can be more if the bank agrees).
- The loan is due at the borrower’s next direct deposit.
- If direct deposits are insufficient to repay the loan within 35 days, Regions takes the funds anyway, even if this overdraws the bank account. The borrower is charged overdraft fees on top of loan cost.
- The loan cost is 10% of the loan amount, which works out to an APR of 365% on a typical loan.
- The bank does no underwriting to determine whether borrower can afford the loan.
Kucan v. Advance America
In late 2010, Justice Center attorneys settled three class action lawsuits against payday lending companies, for a total of $43.75 million for more than 364,000 class members. The settlements in these cases are higher than any other settlement against a payday lender in the entire country, and Justice Center attorney Carlene McNulty and our co-counsel received an award from Public Justice for this litigation effort, and Carlene received the National Consumer Law Center’s Vern Countryman Award. In 2013, Justice Center attorneys paid the final settlement proceeds to victims of illegal payday loans recovered in these major class action lawsuits. Settlements in these cases also resulted in the payment of over $1 million to the state’s Indigent Defense and IOLTA programs to support the provision of legal representation for the poor.