Bank and Credit Union Officials: APR is not a good measure of short-term credit

A March 19, 2009 hearing in the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit, addressed legislation requiring banks and credit unions to calculate overdraft protection fees as an annual percentage rate (APR) under the Truth in Lending Act (TILA). Bank and credit union officials testified that APR was not an accurate measurement of short-term credit.

Click here to read excerpts from the testimonies of bank and credit union officials on the subject of using APR to measure short-term credit

Payday lending is being increasingly targeted by politicians, consumer groups, and mainstream banks who all claim to have consumers’ “best interest” at heart.  Several states have outlawed payday cash advance loans altogether.  Others have enacted regulations that will severely limit or even eliminate your ability to get the cash you need, when you need it.

Our customers have made it clear that the short-term loans we offer are often the best – or only – resource they have to meet unexpected expenses or to avoid expensive overdraft/NSF charges or late fees.  If you want to ensure your right to a full range of options in order to make appropriate financial decisions for yourself and your family, we strongly encourage you to contact your state and Federal government representatives and tell them how you feel.

To help you do this, we have provided some tips and suggested verbiage for writing to your representatives. We thank and congratulate you for taking an active role to address the financial issues affecting you!

Click here for tips on writing to your government representatives.

New Study Shows Payday Lenders Provide Desired Service to Lower and Moderate Income, Middle-Educated, Young American Families

“An analysis of Consumers’ Use of Payday Loans” by Gregory Elliehausen, Division of Research and Statistics, Board of Governors of the Federal Reserve System and Financial Services Research Program, The George Washington University School of Business, describes the demographic characteristics of payday loan customers and considers whether they make rational decisions and if they benefit from access to credit.

Elliehausen notes that only 2% of U.S. adults use payday loans at any one time and provides a detailed picture of the typical payday loan customer, including who they are, how they use the service and their decision-making process.

According to the monograph, customers that use payday loans:

1. Skew young; 63% have children at home
2. Have lower and middle incomes; 41% earn between $25,000 and $50,000; 39% report incomes of $40,000 or more
3. Are educated; 90% have a high school diploma or better, with 54% having some college or a degree
4. Have limited liquid assets and savings, most use other forms of credit
5. Have characteristics that may limit their access to credit
6. Use payday loans moderately, as intended for short-term use
7. Are aware of the cost of their most recent payday loan
8. Consider the alternatives, are satisfied with their decision
9. Benefit by having access to payday loans

Elliehausen concludes that, “Most payday loans are used to pay unexpected expenses or expenses that could not be postponed…If payday loan customers live from paycheck to paycheck with very little discretionary income, even small expenses may cause financial problems and make emergencies a frequent event. In such cases, even frequent use of payday loans may be better than the alternatives.”

For more information:

Click here to read the full text of the CFSA's summary of this monograph.

Click here to view the full text of the study.

The Federal Deposit Insurance Commission has released a new report, FDIC’s Study of Bank Overdraft Programs. Consumer groups and mainstream financial institutions often tout the “astronomical” rates charged by payday loan companies; however, the FDIC’s study shows that cash advance fees are much less than bank overdraft fees.

The Community Financial Services Association of America has prepared a highlights document of this study, with key findings that include:

Noted in the analysis of micro-level data from 39 banks:

• Overdraft fees have APRs ranging from 1067% to 3520%
• 22.6 million NSF transactions were incurred, with a median transaction of $36
• Customers with 5 or more NSF transactions accrued 93.4 percent of the total NSF fees reported
• Young adults paid the most in overdraft fees and are responsible for the most NSF transactions
• Customers in low-income areas were more likely to pay recurrent overdraft charges

Key findings from a survey of 462 FDIC-supervised banks:

• The median overdraft fee, per transaction, was $27
• Customers were automatically enrolled in overdraft protection programs
• Overdraft protection programs are widespread, with most programs starting after 2001
• Banks process large debits first; making overdrafts more frequent
• Banks allow ATMs and debit card overdrafts, but do not alert customers in advance

Conversely, a $100 payday advance with a $15 fee calculates to a 391% APR (compared to 1067% to 3520% APR range reported by FDIC), with full disclosure, no automatic rollovers, and no fees paid without the customer’s knowledge and consent.

For more information:

Click here to read the full text of the CFSA's summary document
Click here to view the full results of the study.