Durbin Engages Community Banks, Credit Unions in Effort to Protect Consumers from Predatory Payday Lending
[WASHINGTON, D.C.] – In response to growing demand for small dollar loans, U.S. Senator Dick Durbin (D-IL) wrote to the Community Bankers Association of Illinois, the Illinois Credit Union League, and the Illinois League of Financial Institutions to engage community banks and credit unions in developing alternative credit options for the twelve million Americans who fall victim to predatory payday loans every year.
“I would appreciate any suggestions you may have as to how we can work together to create a small dollar lending environment beneficial to borrowers, financial institutions, and the economy,” Durbin wrote. “I also encourage you to highlight the challenges that prevent your members from offering safe and affordable small-dollar loans. Consumers deserve better than predatory businesses that make extraordinary profits by trapping them in a debt spiral that leaves them financially worse off.”
Payday loans, which use the borrower’s next paycheck as collateral, often carry annualized interest rates as high as 400 percent. Such loans are frequently designed to trap borrowers in a predatory cycle of debt, with a 2014 Consumer Financial Protection Bureau (CFPB) study finding that four out of five payday loans are rolled over or renewed.
In June, Durbin and more than 30 other Senators wrote to the CFPB to express their support for the initial steps the agency has taken to rein in predatory practices in payday and similar types of lending. The Senators urged the agency to issue the strongest possible rules to combat the “cascade of devastating financial consequences” that these high-priced loans often have on consumers.
The full text of today’s letter is available below.
November 16, 2015
Bob Wingert Tom Kane
President President/CEO
Community Bankers Association of Illinois Illinois Credit Union League
901 Community Drive 1807 West Diehl Road
Springfield, Illinois 62703 Naperville, Illinois 60566
Jay R. Stevenson
President
Illinois League of Financial Institutions
133 South 4th Street
Suite 206
Springfield, Illinois 62701
Dear Mr. Wingert, Mr. Kane and Mr. Stevenson:
Community banks and credit unions are critical to expanding access to affordable credit and financial services. Your mission of providing relationship-based banking in markets that are traditionally underserved allows you to meet the needs of the communities you serve.
Unfortunately, small-dollar consumer loans with reasonable interest rates and low fees are currently missing from the line of banking services financial institutions provide, creating a void that is often filled by payday lenders.
Twelve million Americans use payday loans every year, spending billions of dollars in fees with annual interest rates that can exceed 300 percent. The Consumer Financial Protection Bureau found that more than eighty percent of payday loans are rolled over or renewed within two weeks following the issuance of the original loan, keeping the most economically vulnerable in an inescapable cycle of debt. These loans are often predatory in nature, yet they are the only source of credit many consumers have. In fact, many of these borrowers have relationships with banks, but they turn to payday lending and other alternative financing to help make ends meet.
Studies have shown, demand for small dollar loans is increasing with wider income inequality, creating a market opportunity for responsible alternatives to payday lending. As institutions with long standing relationships with the communities you serve, I believe that community banks and credit unions are well positioned to address this need.
I would appreciate any suggestions you may have as to how we can work together to create a small dollar lending environment beneficial to borrowers, financial institutions, and the economy. I also encourage you to highlight the challenges that prevent your members from offering safe and affordable small-dollar loans. Consumers deserve better than predatory businesses that make extraordinary profits by trapping them in a debt spiral that leaves them financially worse off.
I look forward to your response.