Four State Advocacy Groups Raise Concerns About Prepaid Cards

A recent article on HispanicBusiness.com, “Prepaid Card Fees Can Blindside Consumers” (Thomas Olson, July 12, 2013) highlights a number of troubling issues around prepaid cards, including high fees.  The article cites research findings that growth in this industry is skyrocketing: “According to data from Mercator Advisory Group, Boston, prepaid cards were loaded with about $19.5 billion in 2008. That jumped roughly fourfold to an estimated $76.7 billion last year and is expected to exceed $168 billion in two years.”

The California Reinvestment Coalition, along with the New Economy Project (New York), Reinvestment Partners (North Carolina), and the Woostock Institute (Illinois) work to promote fair, affordable financial services for low-income communities.  Earlier this month, the groups sent a letter to the Consumer Financial Protection Bureau about general purpose reloadable and other prepaid cards that highlighted our concerns about the potential for companies to offer these cards with extra fees, unhelpful credit features (like a line of credit or overdraft feature), or short-term loans.

July 11, 2013

Director Richard Cordray

Consumer Financial Protection Bureau

Dear Director Cordray:

California Reinvestment Coalition, New Economy Project, Reinvestment Partners, and Woodstock Institute appreciate the opportunity to share with you our position regarding inclusion of credit options, including overdraft features and deposit advance products, on general purpose reloadable and other prepaid cards. We have discussed this issue with CFPB staff on several occasions and wish to reiterate that any and all forms of credit must be prohibited on prepaid debit cards for the reasons described below.

Prepaid card companies often target low- and moderate-income people and “unbanked” or “underbanked” people. At best, prepaid cards can offer people access to certain features of traditional checking accounts including, for example, payment networks, a secure alternative to cash, and the ability to see a record of transactions. At worst, prepaid cards are temporary cash substitutes riddled with hidden fees and debt traps.

The addition of a line of credit or overdraft feature undermines the ostensible value proposition of the product—to avoid overdraft costs associated with traditional checking accounts or to prevent spending more than consumers have in their accounts. Although most prepaid cards do not currently offer an overdraft feature, there is no existing regulation that prevents them from doing so. The ability to avoid overspending is likely the most valuable feature of a true “prepaid” card. People who elect to use prepaid cards may qualify for credit, but it should be accessed through a separate product.

We are opposed to prepaid cards that offer access to high-cost credit options such as short-term loans. These loans often include annual percentage rates (APR) comparable to predatory payday loans and can lead to harmful cycles of debt for consumers. These high APR loans potentially violate many state usury laws put in place to protect consumers from predatory lending practices. Although two federal banking regulators have issued proposed rules relating to bank deposit advance products, the proposed rules would not cover all prepaid products on the market, and we encourage the CFPB to prohibit outright any credit, overdraft or loan option on all prepaid cards.

We look forward to discussing this issue with you further. Feel free to contact Dory Rand with any questions or comments.

Respectfully,

Alan Fisher, Executive Director, California Reinvestment Coalition

Sarah Ludwig, Co-Director, The New Economy Project

Peter Skillern, Executive Director, Reinvestment Partners

Dory Rand, President, Woodstock Institute

Hearing Focuses on Direct Deposit Advances, Are They Different Than Payday Loans?

Earlier this week, the Senate Select Committee on Aging focused on direct deposit loans that are made by six banks in the U.S.  Both Wells Fargo and US Bank offer these loans in California.  The hearing was titled “Payday Loans: Short-term Solution or Long-term Problem?” To watch it online, visit the Committee’s website. 

Annette Smith, a 69-year old senior from Rocklin, California testified about her experience with Wells Fargo Direct Deposit advance loans, and the nearly $3,000 in fees she paid for the loans over a five-year period.

Direct Deposit Loan Hearing

ABC News (Congress Shines Spotlight on the Hazards of Payday Loans) reported that Smith asked the committee: “Please do something, whatever you can, to stop banks from doing this to other seniors across the country.” You can read her full testimony here.

Not surprisingly, the witnesses representing banks who make direct deposit advance loans and the payday lenders both appeared to be on the defensive throughout the hearing.  The witness testifying on behalf of the payday lenders suggested that the industry needs to do better underwriting to make sure people don’t caught in cycles, provide installment loans that are truly installment loans (for people who can’t pay back their loans in two weeks), register ALL companies making these loans- storefront or online, and create a code of business practices.

Senator Collins (R-ME) remarked that the conciliatory tone seemed far different than the comments the lobbyists had submitted on a proposal by the FDIC and OCC to re-vamp laws on the direct deposit loans.  CRC, along with 62 other community groups, wrote a letter to regulators suggesting that regulations around the loans needed to be strengthened to better protect customers, including conducting actual underwriting for the loan, increasing transparency about the cost of the loan (by representing the cost as an APR instead of as fees) and ensuring that people didn’t get caught in cycles of debt.  You can read the policy recommendations here.

Direct Deposit Loans

Another witness struggled to explain the difference between a payday loan and a direct deposit advance to Senator Elizabeth Warren (D-MA).

Direct Deposit Loans

Upon questioning by Senator Donnelly (D-IN), the bank lobbyists also struggled to explain why charging 200% interest is an acceptable practice, and instead kept trying to represent the cost of the loan as fees, instead of interest.

The CreditUnionTimes (Seniors Fastest-Growing Segment of Payday Borrowers, Senate Told) highlighted Rebecca Bornè’s testimony about research the Center for Responsible Lending has conducted on these loans, finding that in Florida and California, approximately one in five payday borrowers is aged 55 or older, and that on average, payday lenders take 33% of a borrower’s next Social Security check to repay a loan.

According to Propublica’s account (Senator Presses Consumer Bureau on Installment Lender World Finance), Senator Ron Wyden (D-OR) pressed the Consumer Financial Protection Bureau to do more to investigate companies like World Finance. Propublica focused on this company in an earlier article in May: “The 182 Percent Loan: How Installment Lenders Put Borrowers in a World of Hurt.”

Direct Deposit Loans

Senator Bill Nelson (D-FL), the Chair of the Committee, highlighted the relatively low risk involved in making these loans when the customer’s income is from Social Security. Senator Nelson remarked, “As long as there’s a Social Security Administration, that money will be coming in.”

A report earlier this spring by the Center for Responsible Lending (Triple-Digit Danger: Bank Payday Lending Persists) found that 25% of customers of direct deposit advance loans are Social Security recipients).

When a bank lobbyist said that “We don’t want unhappy customers,” Nelson replied “Right now you’ve got unhappy customers and unhappy senators who represent those customers.”

To learn more about payday lending in California, New York, North Carolina, and Illinois, read the recently released report “The Case for Banning Payday Lending: Snapshots from Four Key States” that was written by the California Reinvestment Coalition, the New Economy Project, the Woodstock Institute, and Reinvestment partners. 

Annette Smith Goes to Washington: California Senior Will Testify about Wells Fargo Direct Deposit Advance Loan

Annette Smith, a 69 year-old resident of Rocklin, California, will testify in Washington DC to the Senate Select Committee on Aging about her experience using a Wells Fargo “Direct Deposit Advance” loan on Wednesday, July 24, 2013.  Smith originally took out one of these loans for $500 in 2007, but because of the repayment terms, she was forced to continue renewing the loan almost every month, which resulted in her paying $2,990 in fees and interest over a five-year period.

If you would like to watch the hearing, titled “Payday Lending: Short-term Solution or Long-term Problem?” it will be aired live on the Senate Select Committee website beginning at 2:00PM (EDT).

The FDIC and OCC both announced proposed rule-making for these types of loans earlier this year.  In a letter to federal regulators about the proposed rules, CRC along with 62 other California community groups, advocated for the following changes:

1) Loan repayment terms should be changed to match existing standards for loans and lines of credit, with customers expected to pay regular payments that would cover a portion of principal, fees or interest over a predictable period of time.

2) Banks should not continue making advances until at least one statement cycle after the customer has repaid the previous advance, thus preventing the destructive cycle of one loan turning into a cycle of debt and fees that repeats itself every month.

3) Loan disclosures should make it easy for customers to compare direct deposit advances against other loan options.  This includes stating the cost of the loan as an Annual Percentage Rate (APR), a practice storefront payday lenders in California are already required to follow.

Have you had a negative experience with a payday loan or a bank deposit advance loan?  CRC would like to hear from you.  If you’d like your story to be public, then comment on this blog post (and, pending approval, it will appear under this blog post), or send us an email:  crc@calreinvest.org and we’ll contact you.

Additional Resource:  

Annette’s Testimony

Groups in Four Key States Call for End to Payday Lending, Joint Report Highlights Need for Strong Action by Federal and State Regulators (May 2013)

The CFPB finds payday and deposit advance loans can trap consumers in debt (April 2013)

Triple-Digit Danger: Bank Payday Lending Persists (March 2013)

California Reinvestment Coalition Applauds Richard Cordray’s Confirmation to CFPB

CRC was happy to see the Senate vote to confirm Richard Cordray as Director of the Consumer Financial Protection Bureau on July 16th. A concerted advocacy effort from community organizations across the U.S. helped move the confirmation forward.

On July 9, CRC joined with seven other community organizations to deliver thousands of petitions to Senator Dianne Feinstein’s office, urging the Senate to confirm Richard Cordray to a full term as director of the Consumer Financial Protection Bureau.

Confirm Richard Cordray to CFPB

The petitions bore the signatures of more than 165,000 people, including over 28,000 Californians.

The California Reinvestment Coalition, the Communications Workers of America (CWA), the Alliance of Californians for Community Empowerment (ACCE), the California Public Research Interest Group (CALPIRG), the Greenlining Institute, Jobs with Justice, the San Francisco Labor Council, and CourageCampaign.org took part in the delivery. Representatives from these organizations also met earlier in the month with Senator Feinstein’s office to discuss the importance of Cordray’s confirmation.