Released: December 01, 2006

Banks urged to offer alternatives to payday loans

Source: Sue Kirchhoff, USA Today

One of the nation’s top banking regulators Thursday announced new efforts to develop alternatives to payday loans and other high-cost products, citing an “astonishing” gap in the cost of credit that is penalizing disadvantaged borrowers.

The comments came as a non-profit consumer group issued a report saying high fees on so-called payday loans, small loans to be repaid with their next paychecks, cost consumers $4.2 billion a year.

The report by the Center for Responsible Lending found an average payday borrower paid $793 for a $325 loan. Further, it said that 90% of payday revenue came from borrowers who were unable to pay the balance and fees by the due date, forcing them to repeatedly roll over the loans. Annual fees can run from about 300% to 1,000%. There are about 22,000 U.S. payday outlets.

“It almost seems as if the market has become divided between two groups: those who successfully rely on banks for virtually cost-free basic financial services and those who pay high amounts,” Federal Deposit Insurance Corp. Chair Sheila Bair told the Consumer Federation of America in a speech.

“The fortunate accumulate wealth through cost-free savings vehicles. … Others pay set-up and maintenance fees for small-dollar savings accounts which erode principal,” she said.

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