Copyright (c) 2005 University of North Carolina
School of Law Banking Institute
North Carolina Banking Institute
April, 2005
9 N.C. Banking Inst. 133
LENGTH: 14264 words
NOTE & COMMENT: I. CONSUMER PROTECTION ISSUES:
Fixing Payday Lending: The Potential of Greater Bank
Involvement
NAME: Michael Bertics
SUMMARY:
... When unforeseen financial difficulties struck
her family, she turned to payday lenders for relief.
... The lender then pays the borrower the face value
of the check minus the payday loan fee, which is
usually around $ 15 for every $ 100 loaned (an APR
of 390% if the loan term is two weeks), but which
can be higher. ... One payday lender, when asked,
even denied that the interest rate of a payday loan
could be measured as an APR. ... If lenders make
such calls before disclosure of payment terms, as is
the common practice, this can end a borrower's
attempt at price shopping immediately lest the
borrower risk the potential embarrassment and
employment risk that a bombardment of confirmation
calls by multiple payday lenders would pose. ... The
debt trap resulting from the disclosure practices,
the price shopping barriers, and the collection
resources of payday lenders is the basis of the
disapproval of payday lending by consumer protection
groups. ... Banks can shift the payday lending
market into a more perfect equilibrium by
instituting price competition, and banks can capture
the entire payday lender market share if they offer
an alternative credit instrument with better terms
than a payday loan. ...
TEXT:
[*133]
I. Introduction
Sandra Harris is an average American. 1 When
unforeseen financial difficulties struck her family,
she turned to payday lenders for relief. 2 Although
this worked at first, Sandra soon found herself
living paycheck to paycheck, just trying to pay off
the loan fees. 3 Eventually, Sandra began to bounce
checks and her car was repossessed. 4 She was forced
to reduce her income tax withholding to increase her
take home pay, but this led to thousands of dollars
in tax liability and eventually wage garnishment. 5
Only through the help of her credit union and her
family has Ms. Harris been able to begin her climb
out of the "debt trap" 6 caused by payday lending. 7
Sandra's story is not unique; critics of payday
lending often cite similar examples. 8 Such negative
publicity has caused widespread [*134] disapproval
of the payday lending industry. 9 Indeed, some
techniques used by payday lenders such as repeated
rollover, 10 high interest rates (often exceeding
200% Annual Percentage Rate (APR)), 11 and the
threat of criminal prosecution upon default 12 may
justify this disapproval.
This Note addresses whether these practices are
necessary characteristics of the payday lending
market, and argues that the objectionable qualities
of the subprime credit market exist because of the
current dynamics of this market. 13 The payday
lending market is currently functioning at an
equilibrium that is harmful to consumers, where
payday lenders are collecting economic rent. 14 This
Note suggests that the entry of banks into the
payday lending market could solve this problem by
enhancing the competitive market forces within the
industry, which would shift the market to a new
equilibrium and extinguish economic rent. 15 Also,
there is evidence that suggests that banks could
benefit from the huge profits that the payday
lending industry has been reaping, 16 while reaching
consumers that they have [*135] not been serving as
effectively. 17
Section II of this note explains the characteristics
of payday loans and the payday lending market. 18
Section III analyzes the payday lending market using
the tools of law and economics and argues that
payday lenders are earning economic rent. 19 Section
IV analyzes the failed attempts at regulating the
payday lending market. 20 Section V proposes and
evaluates a new solution to fixing the payday
lending market: greater bank involvement. 21
II. Characteristics of the Payday Lending Market
A. Characteristics of the Payday Loan
Payday loans are short term, high interest rate,
consumer loans. 22 In the basic payday loan
transaction, the borrower writes a postdated or
undated check to the lender, with the understanding
that the check will not be deposited until the
borrower's next payday (usually two weeks away). 23
The lender then pays the borrower the face value of
the check minus the payday loan fee, which is
usually around $ 15 for every $ 100 loaned 24 (an
APR of 390% if the loan term is two weeks), 25 but
which can be higher. 26
The borrower has several options for paying off the
payday loan. 27 The borrower may either allow the
check given to the payday lender to be cashed, or,
alternatively, he can pay the lender that same
amount in advance of the due date. 28 However, if
the borrower cannot afford to pay off the loan at
the end of the loan period, the borrower can "roll
over" the loan by paying the lender an additional
fee, extending it [*136] another two weeks. 29
B. How Payday Loans Exist in the Credit Market
The payday lending industry has grown tremendously
in the short time since its inception in the early
1990s. 30 By 2000, more than 10,000 payday lenders
operated in the U.S. 31 Payday lenders make around
"sixty-five million loans to between eight and ten
million households" a year, with total loan value
exceeding $ 10 billion. 32 Part of the reason for
this growth is the profitability of this industry
(the industry brings in revenue of over $ 2 billion
a year). 33 Payday lenders average returns on
capital of 24% or more. 34 A majority of these
profits is derived from rollover fees, 35 as most
payday borrowers roll over their loans frequently.
36
[*137] The population that uses payday loans tends
to be low to moderate earners with incomes between $
25,000 and $ 50,000. 37 Payday borrowers tend to be
credit constrained in some way and thus lack access
to more traditional forms of credit. 38 The majority
of customers use payday loans to pay for
unanticipated emergency costs, such as car repairs
or medical bills. 39
Payday loans are appealing to consumers for two
primary reasons. 40 First, payday borrowers often
perceive that they have no other credit options. 41
This perception can be incorrect; in fact there is
evidence that many subprime borrowers could qualify
for prime credit. 42 Second, payday loans can be
obtained with great ease and speed. 43 A payday loan
can usually be obtained in under twenty minutes 44
with little or no credit check, 45 these being
typically limited to checking for other outstanding
payday loans. 46 All a borrower needs to have to get
a payday loan is "a checking account, a steady job,
and no history of [*138] writing bad checks." 47
C. Payday Lending and the Debt Trap
Payday lending pushes consumers into a debt trap for
several reasons. 48 First, rollover is inevitable
for most payday loan users, given the short, two
week term of most payday loans. 49 Most payday
borrowers only have a small surplus of cash in any
given week, and thus are rarely able to repay the
loan within the two week term while still paying for
necessary expenses. 50
Another factor that increases consumer
susceptibility to the debt trap is the lending
practices of many payday lenders. 51 A recent survey
of payday lenders in Ohio revealed that payday
lenders are quite willing to allow individuals to
obtain multiple loans simultaneously without any
determination of the individual's ability to repay
the loans, 52 a practice commonly associated with
predatory lending. 53 Since the majority of payday
lenders use the Tele-Track service, they know when
consumers have multiple outstanding loans, 54 and
yet the study revealed that it was [*139] possible
to obtain multiple loans from the same payday lender
quite easily. 55 Given that consumers often have
difficulty paying off a single payday loan in two
weeks, it is clear that many will be unable to pay
off multiple payday loans in the same time period.
56
The disclosure practices of payday lenders also play
a role. 57 Payday lenders erect barriers to price
shopping, enabling them to charge higher prices. 58
For example, many payday lenders hide basic
information about payday loans from consumers. 59
The Ohio survey showed that a majority of the payday
lenders refused to let consumers take the loan
contract home to examine it prior to the loan or to
let the consumer have a copy of the contract after
the loan was made. 60 A few of the payday lenders
even claimed that it was against the law to take the
contract out of the store. 61 Payday lenders often
gave false or misleading information about payday
loans, or failed to give the interest rate in terms
of APR 62 as required by federal law. 63 One payday
lender, when asked, even denied that the interest
rate of a payday loan could be measured as an APR.
64 Other payday lenders also failed to state the
interest rate of payday loans as an APR in
advertisements for payday loans even though this is
also required by federal law. 65
Another way that payday lenders prevent price
shopping is by delaying disclosure of loan terms. 66
Since payday lenders are not required to release
information such as the interest rate or finance
charges until immediately before the consummation of
the loan contract, 67 payday lenders can use this
delay tactic to raise the cost of price shopping.
Payday lenders often confirm the borrower's [*140]
employment with a phone call to the borrower's place
of employment. 68 If lenders make such calls before
disclosure of payment terms, as is the common
practice, this can end a borrower's attempt at price
shopping immediately lest the borrower risk the
potential embarrassment and employment risk that a
bombardment of confirmation calls by multiple payday
lenders would pose. 69 Also, by delaying disclosure
of loan terms, payday lenders force borrowers to
invest more time and effort in obtaining loan
information, which makes price shopping more
difficult. 70 These tactics create serious barriers
to price shopping and often result in borrowers
failing to extend their price searches beyond one or
two lenders. 71
Payday lenders have debt collection options that
most debt collectors lack. 72 When a borrower
defaults, the payday lender can use civil and
criminal remedies available under bad check
statutes. 73 For instance, in Ohio, payday lenders
used the bad check statute to threaten suit for
treble damages and sometimes even wage garnishment.
74 Further, the threat of criminal prosecution under
bad check statutes is also a very effective debt
collection practice. 75
The debt trap resulting from the disclosure
practices, the price shopping barriers, and the
collection resources of payday lenders is the basis
of the disapproval of payday lending by consumer
protection groups. 76 These practices suggest that
payday loans are probably not optimally serving the
needs of the subprime borrower. 77
III. Payday Lending and Economic Rent
To analyze the payday lending market, this Note uses
the tools of [*141] law and economics. A "perfect
market" is characterized by several qualities.
First, it is assumed that in any given market, there
are a large number of sellers that offer
substantially identical products. 78 Second, there
are a large number of buyers that are perfectly
informed of the of the qualities of the good that
they are buying, including the likelihood that the
good will malfunction, and also of the prices for
this good offered by all of the different sellers.
79 Third, all actors in the market are rational
profit maximizers, that is, each actor attempts to
maximize his economic benefits and acts in a way
that is rationally aimed towards profit
maximization. 80 Fourth, there are no barriers for
sellers to enter or exit the market. 81 A market
with these qualities, a "perfect market," will
achieve a state known as perfect equilibrium, that
is, the supply of the good offered by sellers will
equal the demand for the good, and the price of the
good will be stable because small fluctuations in
demand will be matched by similar responsive moves
in supply through the entrance to and exit from the
market of sellers. 82
The perfect market will have one additional
attribute. The return on capital for the seller in
an efficient market for a particular good will be
identical to the return on capital in every other
efficient market once adjusted for risk. 83 This is
because if the return on capital in different
product markets differs, sellers, being profit
maximizers will leave the market with the lower
return on capital and enter the market with the
higher return on capital. 84 The movement of sellers
into and out of a market causes the return on
capital in both markets to equalize. 85 If the
return on capital in one market is greater than the
return on capital in other markets, that difference
is referred to as economic rent and this means that
either buyers are paying disproportionately too much
for a good or sellers are taking on disproportionate
risk. 86 The implication is that a perfectly
functioning [*142] market extinguishes economic rent
because sellers are profit maximizers (e.g. rent
seekers) that maximize profits by price competing
with each other. 87
An imperfect market exists when one or more of the
four qualities of a perfect market are absent. In an
imperfect market, the price can be stable (in
equilibrium) while at the same time, sellers are
earning economic rent. 88 Thus, the normal workings
of the perfect market fail to extinguish economic
rent in an imperfect market. 89 One common example
of an imperfect market is a monopoly where there is
only one seller in the market. 90 While in a perfect
market sellers will base the price of a good on the
cost of production, 91 in a monopoly, the seller
will maximize profits by basing his prices on buyer
need to a greater degree. 92 Thus, monopolists earn
excess return on capital, economic rent, and the
consumer is worse off than if the market functioned
perfectly. 93
Game theory predicts that a persistent imperfect
market will occur when there are certain factors
that create an incentive for sellers to engage in
tacit price collusion and form an oligopoly. 94
There is an incentive for collusion when long term
collusion would lead to greater profits than long
term competition. 95 A number of factors make this
incentive to tacitly collude more likely to control
firm behavior. These factors include the youth of
the industry, the number of competitors in the
industry remaining small, the inability of buyers to
price shop, easy access to the price information of
competitors, and the existence of competition based
on factors other than price. 96 The more of these
factors that are present in a particular market, the
more likely persistent tacit price collusion will
occur and sellers will earn economic rent. 97 The
payday lending market exhibits many of these
factors.
[*143] First, this market is relatively young, being
in existence since only the early nineties. 98 As a
result, price competition has not had as much of an
opportunity to be established as a strategy of firms
in the market. 99
Second, payday borrowers are not particularly
sophisticated, inhibiting their ability to price
shop. 100 Unsophisticated buyers will not appreciate
the true cost that they are paying for goods and
thus they will accept a higher price for the goods
than if they had correct information. 101 Thus,
unsophisticated borrowers are less capable of the
price comparison necessary to make payday lenders
price compete. 102 This allows payday lenders to
charge a higher price than borrowers would accept if
they had perfect information and this allows payday
lenders to earn economic rent. 103
Third, payday lenders are engaged in activities that
discourage price shopping 104 and instead compete
based on other factors such as location of the
store, flashy signs, promises of quick cash, and
name recognition. 105 When payday lenders increase
the cost of gathering information, buyers cannot
efficiently price shop. 106 When this is the case no
seller has an incentive to decrease his prices since
no buyer will be able to perceive the significance
of this change, and thus payday lenders will
continue to charge higher prices and earn economic
rent. 107
Further, when there are barriers to entry into a
market created either by high start up costs, laws,
or other factors, new firms may have difficulty
entering this market and may be dissuaded entirely,
allowing the imperfect market to exist persistently.
108 Large players like banks have not entered the
payday lending market to act as payday lenders
because of such barriers to entry. 109 First, banks
may be prevented for reputational reasons from
engaging in payday lending since there is [*144]
potentially a stigma attached to lending at rent
seeking interest rates to unsophisticated customers.
110 Second, the costs of servicing and creating
payday loans are significant and pose a significant
barrier to entry into the market. 111 Third, many
banks do not have branches in the areas primarily
served by payday lenders and do not offer as
convenient hours. 112 Thus, banks might have to open
additional branches and offer more extensive hours
to reach payday borrowers. Fourth, because payday
lenders do not price compete, banks would have to
compete using the same tools as payday lenders to
consistently earn the same economic rent, and banks
cannot easily or potentially soundly compete based
on location of the branch, flashy signs, promises of
quick cash, and name recognition. 113
These factors suggest that payday lenders are
earning economic rent, and there is empirical
evidence to support this contention. Although payday
lenders claim that the fees they charge are
proportional to the risk and costs of their loans,
114 critics of payday lenders claim that the default
rates of payday loans are no higher than those of
loans with much lower interest rates. 115 Further,
payday lenders are earning at least 24% return on
capital with triple digit interest margins, 116
while banks are making closer to 15% return on
[*145] capital with interest margins closer to 3%.
117 This difference is significant, especially in
the credit market where the return on capital for
major players should be substantially similar due to
the size and sophistication of the players in the
market. 118 Thus, payday lenders are earning
economic rent.
IV. Failed Attempts to Regulate Payday Lending
While legislatures have attempted to improve the
payday lending market for consumers, their efforts
have largely failed. Legislatures have attempted to
regulate payday lenders with two categories of laws:
usury regulation and regulation of loan terms
disclosure. 119 This section will show that neither
kind of regulation effectively regulates the
operation of payday lenders, 120 although changes in
the nature of either regulation might alter this
verdict.
A. Usury Regulation
Usury regulation limits the maximum interest rate
that can be charged on a loan. 121 Although there
are usury regulations imposed by statute at both the
state and federal levels, 122 Federal usury
regulation does not effectively limit interest
rates. 123 Indeed, Federal law enables banks to
circumvent state usury regulations, since banks are
allowed to charge the interest rate allowed in the
state where the bank is located. 124 Thus, even
though many states have regulations limiting
interest rates, the rates are not binding many
lenders because of federal preemption. 125 [*146]
Non-bank lenders such as payday lenders can take
advantage of federal preemption by partnering with
an out-of-state bank that makes the payday loan and
then immediately sells it to the payday lender that
is located in the state with the restrictive usury
laws. 126 This practice is referred to as charter
renting. 127
Charter renting to payday lenders is only practiced
by Federal Deposit Insurance Corporation (FDIC)
regulated state banks since all other bank and
savings association regulators have put a stop to
charter renting arrangements. 128 The FDIC has not
followed suit however, and thus FDIC regulated state
banks may still charter rent. 129 If the FDIC does
follow suit in the future and prohibit charter
renting to payday lenders, then state usury
regulation would have the power to control payday
lending. 130
Usury regulation may also become a more effective
means of regulating payday lenders in the wake of
the recent Georgia case, Bankwest v. Baker. 131 In
Bankwest v. Baker the Federal District Court for the
Northern District of Georgia upheld a Georgia law
that defined an in-state agent as the maker of a
loan if it retained a predominant economic interest
in the loan. 132 The purpose of this law was to
bring charter renting payday lenders within the
reach of Georgia usury [*147] laws. 133 This state
law, if upheld on appeal, would open the door for
states to be able to stop charter renting
nationally. 134 Thus, there is the possibility that
either state law or FDIC regulatory action could
make state usury regulations binding on all payday
lenders. 135
One danger posed by the use of usury law to regulate
payday lending is that the regulator could set the
maximum allowable interest rate below the perfect
market interest rate which would drive all lenders
out of the market, and this would hurt consumers.
136 However, if used correctly, usury regulation
could be used to extinguish the economic rent that
is arguably present in the current payday loan
market, making loan terms more favorable to
consumers. 137 The effectiveness of usury limits for
extinguishing rent is thus dependent on the ability
of the regulator to predict the non-rent interest
rate. 138 On the other hand, [*148] open market
competition would extinguish rent automatically
without running the risk of closing the market. 139
B. Truth in Lending Act
The primary regulation regarding the disclosure of
loan terms is the Truth in Lending Act (TILA). 140
The purpose of TILA was to provide consumer
protection by facilitating an efficient market
outcome by encouraging price shopping. 141 Sadly,
TILA has failed to provide real protection to payday
borrowers. 142 TILA requires the disclosure of
interest and finance charges to borrowers before the
consummation of the loan; 143 Regulation Z, a
regulation promulgated by the Federal Reserve
interpreting TILA, requires that these disclosures
be made "clearly and conspicuously in writing, in a
form that the consumer may keep ... before the
consummation of the transaction." 144 Theoretically,
if TILA required these disclosures to be made
sufficiently far in advance, it would ensure real
price shopping in the payday lending market. 145
Courts, however, have not read the timing
requirement strongly. Both the Fourth and Seventh
Circuits have held that the disclosure of the terms
need only be made moments before the consummation of
the agreement. 146 Also, in a ruling further
limiting the effectiveness of TILA, the Sixth
Circuit, in Baker v. Sunny Chevrolet, Inc., 147
stated that statutory damages are not available for
a violation of the timing requirement of Regulation
Z. Thus, Baker requires proof of actual damages, a
prospect extremely chilling to those considering
representing a payday borrower. 148 These rulings
eviscerate the power [*149] of TILA to force payday
lenders to allow meaningful price shopping in the
payday lending market. 149 As Judge Posner has said,
"so much for ... [TILA] as a protection for
borrowers." 150 Although a stronger TILA or binding
usury laws would potentially fix many of the
problems with payday lending, 151 this note suggests
a different possible solution that would not require
regulatory change: bank involvement in the payday
lending market.
V. The Solution: Greater Bank Involvement in The
Subprime Credit Market
This note suggests that the payday lending market
would be fixed if banks entered the market and
competed with payday lenders. So far many banks have
chosen not to enter the payday lending market and
price compete with payday lenders 152 though this is
starting to change. 153 There are several reasons
for this. First, banks themselves state that the
payday lending market is not sufficiently
profitable. 154 As explained earlier, there are
barriers to entry such as high servicing costs that
prevent banks from competing as payday lenders. 155
Second, regulation such as state usury regulation
may appear to be a barrier to banks that wish to
participate in this market for either logistical or
reputational reasons. This note suggests that if
banks take advantage of cost saving devices, they
can price compete successfully with payday lenders
while also offering a superior product. 156
Banks can shift the payday lending market into a
more perfect [*150] equilibrium by instituting price
competition, 157 and banks can capture the entire
payday lender market share if they offer an
alternative credit instrument with better terms than
a payday loan. 158 Banks could institute price
competition by advertising both the costs of their
loans and the fact that they are cheaper than the
loans offered by payday lenders. 159 Consumers might
well be willing to travel longer distances and deal
with less extensive hours to take advantage of lower
rates and better terms offered by banks. 160 Banks
following this proposal would gain access to a
larger customer base which allows the
diversification of risk and easier access to
customers. Also, serving the subprime market
specifically should increase the likelihood of the
bank earning a favorable Community Reinvestment Act
(CRA) Rating. 161 The following subsection analyzes
current and potential credit instruments that could
compete with payday loans.
A. Current and Possible Alternatives to Payday Loans
The State Employee Credit Union (SECU) salary
advance loan (SAL) exists explicitly to compete as a
lower cost alternative to payday loans. 162 This
loan is available to any member of the SECU who has
his paycheck directly deposited at the SECU. 163 The
SECU provides a maximum ceiling of $ 500 for these
loans and they are offered at an APR of 11.75%. 164
Further, the SECU offers free credit counseling for
users of any of their loans. 165 In addition, the
SECU creates Salary [*151] Advance Cash Account (SACA)
for each member that takes out a SAL, and a small
portion (5%) of each SAL goes into the SACA and is
pledged as collateral for the loan. 166 Since the
SACA grows every time a borrower takes out or renews
an SAL, a borrower can use his SACA to eventually
pay off an outstanding SAL, guaranteeing that the
cycle of reliance on the SAL will end. 167
Phil Greer, SECU Senior Vice President of Loan
Administration, explains that the SAL is a feasible
loan instrument for the SECU. 168 Although exact
statistics on these loans were not available, Mr.
Greer estimates that the SECU makes around a 3% net
retention 169 in earnings on these loans after
taking into account losses and operating costs. 170
Over 40,000 SECU members have used this service, and
there is an approximate default rate of around 2.8%.
171 Over the past four years this default rate has
lead to a charge off of around $ 800,000 though $
120,000 has later been recovered. 172 The direct
deposit requirement of the SAL decreases the default
rate because the loan is repaid immediately after
the paycheck is deposited. Nonetheless, default does
occur because the individuals with the loan can
switch banks or lose their jobs while the loan is
still outstanding. 173 Further, although no exact
statistics were available, members' responses to
both the SAL and to the credit counseling option
have been very positive. 174 The SECU is not the
only credit union to offer an alternative credit
instrument to the payday loan, and other credit
unions have had similarly positive experiences. 175
[*152] Austin Bank of Chicago is also planning on
offering an instrument to compete with payday loans.
176 The instrument is a line of credit. 177
"Would-be borrowers will apply for three-year loans
of $ 1,000 to $ 10,000. If approved, they will
receive checks for drawing on the loan. If they
write checks, they will have to make monthly
payments of 3% of the principal and accrued interest
until the balance is paid." 178 This kind of credit
alternative has lower transaction costs than a
payday loan. 179 To qualify for this credit line the
borrower would have to hold an account with the
bank. 180 Wells Fargo & Co. of San Francisco has a
Direct Deposit Advance program that "allows
customers with direct deposit accounts to borrow up
to half of the money directly deposited a week in
advance." 181
Professor Michael Barr suggests that banks could
also compete with payday lenders by offering
overdraft lines of credit. 182 He argues that
overdraft lines of credit could be offered at both
lower cost and lower risk because there is no need
for face-to-face transactions and the loan
repayments could occur automatically. 183 Banks
would have to alter the period over which the loan
is repaid though from the current policy of around
30 days. 184 These overdraft lines of credit would
have to differ from the bounce protection offered by
many banks if they are to serve the credit needs of
consumers both in terms of the cost of these lines
of credit and in terms of the qualifications
required to qualify for overdraft lines of credit.
185 For instance, banks would have to dispense with
the requirement of a good credit report to qualify
for overdraft lines of credit 186 to reach the
borrowers targeted by the proposal and would
probably have to loosen other requirements as well.
[*153]
B. The Economic Feasibility of Offering Alternatives
to Payday Loans
Payday loans are perceived as unfeasible by banks
probably because of the high transaction costs in
servicing and underwriting these loans. 187 Indeed,
the Winnipeg Study, a feasibility analysis of lower
cost payday lending, came to the conclusion that the
break even interest rate for payday lenders is
around 130%. 188 This analysis is based on the
assumption that the lender's only business is to
offer loans and that a single staff person would
make 190 loans in a year of value totaling $ 40,000
and would do the labor involved in accounting for
these loans. 189 The break even calculation assumes
loan loss rates of 3% (which is closer to those of
the SECU than to the lower loss rates of payday
lenders) 190 and it takes into account building
maintenance costs and rent. 191 Banks would probably
not be enthusiastic about offering loans with APRs
exceeding the 130%. Further, since a small loan can
cost as much to underwrite as a large loan, 192 the
payday lending business model is probably not a
feasible option for banks in the current market. 193
However, innovations in banking services can
decrease the transaction costs involved in making
payday loans, allowing banks to charge lower
interest rates than the feasibility study suggests
and giving banks a significant advantage over payday
lenders. 194 First, banks have greater access to
capital at cheaper rates than payday lenders since
banks accept deposits. Second, lines of credit like
that offered by Austin Bank of Chicago 195 or like
those suggested by Professor Barr 196 decrease the
servicing costs of these loans since banks would not
need employees helping borrowers renew loans every
two weeks as payday [*154] lenders do with loan
rollover. 197 Having a direct deposit requirement
like the SECU 198 or Wells Fargo & Co. of San
Francisco 199 would also decrease servicing costs by
allowing direct deduction of loan payments while
also decreasing the likelihood of default. 200
Indeed, assuming that a bank was offering overdraft
protection, the APR of 130% used by the Winnipeg
Study would yield a net return on capital of close
to 100%. 201
Although it might appear that payday lenders have an
economic advantage over banks in abusive collection
practices, 202 this advantage is not significant
competitively. While the exact economic value of
this advantage is not entirely clear, 203 this
apparent economic advantage is not a competitive
advantage for payday lenders because of the working
of the market. Abusive collection practices allow
the payday lender to save money on collections, but
this only works if consumers know about the
practices (e.g. consumers can only be encouraged to
default less frequently by bad check laws if payday
lenders actually make threats). When banks do not
make such threats, the abusive collection practices
become just another contract term that is assigned
an economic value by the market, and this
extinguishes the payday lenders' advantage. 204
C. The Regulatory Feasibility of Bank Involvement
Banks face two potential regulatory hurdles in
offering alternatives to payday loans: usury laws
and safety and soundness concerns. Even though banks
may be able to feasibly offer alternatives [*155] to
payday loans, banks still might have to circumvent
usury laws in some states with more stringent usury
limits (such as North Carolina with its 16% limit on
small loans). 205 The most obvious way to do this is
for the bank to import interest rates under federal
law from a bank located in a state with favorable
usury laws. 206 This could be done by having the
in-state bank act as an agent of an out-of-state
bank owned by the same holding company as is done
with credit card banks. 207 This is not charter
renting because the loans would be held by an out of
state affiliated bank, and not subsequently
transferred to an entity that could not make the
loan independently. 208
Banks making subprime loans are subject to various
regulatory guidelines to ensure that they continue
to operate in a safe and sound manner. 209 The
federal bank regulators have divided banks making
subprime loans into two groups. 210 Those banks
whose subprime lending programs account for less
than 25% of tier one regulatory capital 211 are
subject to the Interagency Guidance for Subprime
Lending Programs (IGSLP) (March 1, 1999). 212 Those
banks with subprime lending programs greater than or
equal to 25% of tier one regulatory capital are, in
addition, subject to the Expanded Guidance for
Subprime Lending Programs (Expanded IGSLP). 213
The IGSLP "establishes the agencies' expectations
for proper business planning, risk management, and
controls." 214 Banks that do not properly account
for risk under these guidelines are lending in an
unsafe and unsound manner. 215 The IGSLP notes that
effective credit risk evaluations and collection
practices may differ from those that could be used
with prime borrowers, and thus banks need to move
[*156] carefully into the subprime credit market.
216 The IGSLP essentially requires banks to have a
more detailed set of internal evaluations of
collection practices, credit risks, and underwriting
requirements than they would with prime loans. 217
Also, if institutions intend to securitize subprime
portfolios, due to the volatility of the market,
they are required to develop a contingency plan to
deal with the event that they will not be able to
sell the subprime loans. 218
Pursuant to the Expanded IGSLP, if examiners
determine that risk management provisions are
deficient, the examiners may require that the bank
cease to engage in subprime lending. 219 The
Expanded IGSLP also details the appropriate
procedures for banks to deal with expected losses
from subprime loans. 220 Lenders are required to
document their opinion on the capital necessary to
offset the added risk of subprime loans and
examiners are to evaluate these opinions on a case
by case basis. 221 In general, the Expanded IGSLP
places greater burdens upon banks to prove that they
are lending in a safe and sound manner. 222 These
two sets of guidelines show that banks are not
prohibited from engaging in subprime lending for
safety and soundness reasons, and must take
sufficient steps to deal with the risks and costs
associated with these programs. Banks must also
determine the level of regulation that they are
willing to accept in establishing the appropriate
size for their subprime lending programs. 223
D. Reputational Feasibility of Bank Involvement
There are two primary reputational concerns raised
by bank entry into this market. First, there may be
a reputational risk arising if banks were forced to
circumvent state usury laws. However, the fact that
banks routinely circumvent these laws with their
credit card [*157] programs should help assuage this
concern. 224 Second, the reputational risk
associated with debt collection practices is a
concern for banks. The threat of criminal
prosecution under bad check laws, although
effective, is probably something that banks would
want to avoid for reasons of reputation. 225 The
Interagency Guidelines for Subprime Lending
acknowledge that different collection practices may
be necessary for subprime loans. 226 However, the
FDIC guidelines for Payday Lending note that illegal
collection practices should hurt a bank's CRA
rating. 227 Thus, banks will have to develop a plan
for how to appropriately deal with collection
practices in a safe and fair manner under this
proposal to avoid reputational risks. The use of a
direct deposit requirement could help decrease debt
collection reputation risk by automating debt
collection to a greater degree.
VI. Conclusion
Greater bank involvement in the payday lending
market has a number of policy advantages. First,
consumers would have better access to more
affordable credit than is currently available. 228
The better terms and prices afforded by efficient
competition would enable individuals to obtain
credit better tailored to their specific situations.
229 Second, bank involvement would allow many
subprime borrowers to develop positive credit
histories. 230 Payday lenders do not report their
loans to credit reporting agencies. 231 Thus,
borrowers who use payday loans never develop
positive credit histories. 232 Bank involvement
could very easily remedy this problem and allow many
subprime borrowers to cease to be subprime credit
risks. 233 The SECU already [*158] reports salary
advance loans to credit reporting services so that
its users can develop positive credit histories. 234
Banks may have a unique opportunity to enter and
reform a market and at the same time make a profit.
This opportunity is an illustration of self interest
resulting in collective benefit. Should banks
continue to determine that there is profit to be
made in this market and enter this market in greater
numbers, then they will be able do something that
federal and state legislatures, federal and state
agencies, and even consumer groups have been largely
unable to accomplish: stop the abusive lending
practices of payday lenders.
Legal Topics:
For related research and practice materials, see the
following legal topics:
Banking Law > National Banks > Interest & Usury >
Interest
Banking Law > Consumer Protection > Truth in Lending
> Disclosure
Banking Law > National Banks > Interest & Usury >
Usury Litigation
FOOTNOTES:
n1. See Center for Responsible Lending, The Victims
of Payday Lending-Keeping up: Sandra Harris' Story,
at http://www.responsiblelending.org/payday/victims-2.cfm
(last visited Oct. 8, 2004) (on file with the North
Carolina Banking Institute Journal) [hereinafter
Sandra Harris Story].
n2. See id.
n3. See id.
n4. See id.
n5. See generally id.
n6. Within the context of this Note, "debt trap"
refers to the situation where a consumer falls into
debt and is unable to pay down the principal of the
debt. The borrower is stuck in a cycle of paying
interest or finance charges that will end only as a
result of outside help or bankruptcy.
n7. See Sandra Harris Story, supra note 1.
n8. E.g., Creola Johnson, Payday Loans: Shrewd
Business or Predatory Lending?, 87 Minn. L. Rev. 1,
2 (2002); Charles A. Brusch, Comment, Taking the Pay
Out of Payday Loans: Putting an End to the Usurious
and Unconscionable Interest Rates Charged by Payday
Lenders, 69 U. Cin. L. Rev. 1257, 1257 (2001); Lisa
Blaylock Moss, Comment, Modern Day Loan Sharking:
Deferred Presentment Transactions and the Need for
Regulation, 51 Ala. L. Rev. 1725, 1729 (2000);
Thomas A. Wilson, Comment, The Availability of
Statutory Damages Under TILA to Remedy the Sharp
Practice of Payday Lenders, 7 N.C. Banking Inst.
339, 339 (2003); see also Center for Responsible
Lending, The Victims of Payday Lending, at http://www.responsiblelending.org/
payday/victims.cfm (last visited Oct. 8, 2004)
[hereinafter CFRL].
n9. See, e.g., Michael S. Barr, Banking the Poor, 21
Yale J. on Reg. 121, 149 (2004); Johnson, supra note
8, at 2; Christopher L. Peterson, Truth,
Understanding, and High Cost Consumer Credit: The
Historical Context of the Truth in Lending Act, 55
Fla. L. Rev. 807, 902-03 (2003); see also Brusch,
supra note 8, at 1257; Moss, supra note 8, at 1729;
see generally Daniel A. Edelman, Payday Loans: Big
Interest Rates and Little Regulation, 11 Loy.
Consumer L. Rev. 174, 175 (1999) (arguing that
payday loans have interest rates that are not cost
justified and that payday lenders violate the Truth
in Lending Act (TILA)). For disapproval of payday
lending by Consumer Groups, see Jean Anne Fox,
Unsafe and Unsound: Payday Lenders Hide Behind FDIC
Bank Charters to Peddle Usury (March 30, 2004),
available at http://www.consumerfed.org/pdlrentabankreport.pdf
(last visited Oct. 31, 2004) (voicing the
disapproval of the Consumer Federation of America);
Council for Responsible Lending Webpage at http://www.responsiblelending.org/
payday/index.cfm (last visited Oct. 31, 2004).
n10. Rollover refers to when a loan is refinanced
when the term of the loan comes due. See Johnson,
supra note 8, at 2-3. Repeated rollover is when a
loan is rolled over many times and this can be
predatory when the high interest rates over longer
periods push a debtor into an inescapable cycle of
debt. See id.
n11. Annual Percentage Rate (APR) is a way of
calculating the interest rate on a loan. See
Definition of APR at http://www.goodmortage.com/mortgage_school/MSAPR.htm
(last visited Jan. 5, 2005). APR refers to the
amount of interest that would have to be paid on the
principal of a loan if the term of the loan extended
for one year. See id.
n12. See Johnson, supra note 8, at 26.
n13. See infra notes 94-118 and accompanying text.
n14. See infra text accompanying notes 78-97
(explaining the economic terms used in this
article); infra text accompanying notes 94-118
(explaining the dynamics of the payday lending
market).
n15. See infra notes 157-161 and accompanying text.
n16. See infra notes 162-204 and accompanying text.
n17. See infra note 228 and accompanying text.
n18. See infra notes 22-77 and accompanying text.
n19. See infra notes 78-118 and accompanying text.
n20. See infra notes 119-151 and accompanying text.
n21. See infra notes 152-227 and accompanying text.
n22. See Johnson, supra note 8, at 2.
n23. See Scott Andrew Schaaf, Comment, From Checks
to Cash: The Regulation of the Payday Lending
Industry, 5 N.C. Banking Inst. 339, 341-42 (2001).
n24. See id.
n25. See id. at 342.
n26. See Johnson, supra note 8, at 31; Moss, supra
note 8, at 1729.
n27. See Schaaf, supra note 23, at 342.
n28. See id.
n29. See id.
n30. See Barr, supra note 9, at 149 (noting in
addition that "the short-term lending function has
long been filled by pawnshops, auto title lenders,
retail installment credit, and loan sharks, to name
a few").
n31. See id.
n32. See id. at 150.
n33. See id. at 149-50.
n34. See id. ("The industry reports gross margins of
30%-45% of revenue, with losses at 1%-1.3% of
receivables and return on investment of 24%"); see
also Daniel A. Edelman, Regarding Payday and Title
Loans, at http://www.edcombs.com/CM/News/news20.asp
(last visited Nov. 29, 2004) (citing studies that
showed payday lender returns on capital at 30% and
40% which is about 3 times the returns that banks
are making) [hereinafter Regarding Payday Loans];
Brendan Koerner, Preying on Payday, at http://www.motherjones.com/news/outfront/2001/05/payday.html
(last visited Nov. 29, 2004) (citing a return on
equity of 35%); Trihouse Enterprises Inc., Industry
Overview, at http://www.paydayandpaycheckloans.com/payday-loan-industry.
html (last visited Nov. 29, 2004) (citing a return
on capital of 30%).
n35. See Barr, supra note 9, at 157. This means that
the majority of payday lender's gross income comes
from payday loans that are renewed. Id. The fact
that payday lenders make the majority of their
income on payday loans that are renewed is a
reflection of the statistics that show that the
majority of payday loan fees come from the renewal
of a preexistent loan rather than from new customers
taking out new loans. See id. at 157.
In North Carolina in 2000, 40% of all payday loan
revenues were generated by the 18% of customers who
took out an average of at least one loan per month.
Each 1% increase in the share of customers who
borrow at least monthly from the company increased
the outlet's bottom line by $ 790.
See id.
n36. See Barr, supra note 9, at 156.
A study of payday borrowers in Illinois found that
the median borrower had more than ten loan contracts
over a two-year period, and that one-fifth of
borrowers had twenty or more contracts in that time.
In Wisconsin, 56% of payday borrowers took out at
least eleven loans in one twelve-month period. In
Indiana, 77% of all payday transactions were
rollovers, and the average annual number of loan
renewals was ten. In North Carolina, the typical
payday loan customer took out seven loans in one
year from one lender. The CFSA study found that
three-quarters of payday borrowers rolled over their
loan at least once, and that 30% had seven or more
rollovers. Using the Wisconsin statistic as an
example, the typical payday loan consumer, who takes
out eleven two-week payday loans per year, for the
average loan amount of $ 300, at the average 470%
APR from the Consumer Federation of America (CFA)
survey, spends nearly $ 600 annually in fees.
See id. See also Edelman, supra note 9, at 174;
Brusch, supra note 8, at 1272; Schaaf, supra note
23, at 346.
n37. See Barr, supra note 9, at 153.
n38. See id. See, e.g., Johnson supra note 8, at 11
(stating that the reasons for being credit
constrained range from lacking a home and thus
lacking an equity line of credit to having a damaged
credit history possibly declaring bankruptcy and
having little or no savings).
n39. See Johnson, supra note 8, at 103.
n40. See infra text accompanying notes 41-47.
n41. See e.g. Schaaf, supra note 23, at 344.
n42. See Michael S. Barr, Access to Financial
Services in the 21st Century: Five Opportunities for
the Bush Administration and the 107th Congress, 16
Notre Dame J.L. Ethics & Pub. Pol'y 447, 457 (2002).
n43. See Schaaf, supra note 23, at 344.
n44. See Barr, supra note 9, at 151.
n45. See Edelman, supra note 9, at 174; Schaaf,
supra note 23, at 343.
n46. See Barr, supra note 9, at 151 (explaining that
Tele-Trak is used by payday lenders to track the
number of subprime loans outstanding).
n47. See Schaaf, supra note 23, at 343.
n48. See infra notes 49-77 and accompanying text.
n49. See Brusch, supra note 8, at 1280-81.
n50. See Brusch, supra note 8, at 1280.
One study analyzed the "ability to repay' of
borrowers earning $ 25,000 a year and borrowers
earning $ 35,000 a year. This study concluded that a
person making $ 25,000 a year would, without
payments on a payday loan, fall $ 14 a week short on
recurring payments for food, housing, healthcare,
transportation, and utilities, and a person making $
35,000 would have a weekly surplus of $ 67. These
figures do not include emergency payments for car
repairs or medical treatment, which points to the
second major factor contributing to the high default
rate of payday loans; the two-week duration of most
payday loans does not give borrowers a chance to
recover from the problem that sent them to the
payday lender in the first place. As previously
illustrated, borrowers start out with an extremely
small surplus. To give them only two weeks to
accumulate enough money to pay off a loan, and to
leave them with nothing to pay for emergencies that
may arise during the life of the loan, is an
untenable proposition.
Id.
n51. See Johnson, supra note 8, at 26.
n52. See id. at 63.
n53. Lissa L. Broome & Jerry W. Markham, Regulation
of Bank Financial Services Activities 465 (2nd ed.
2004).
n54. See Johnson, supra note 8, at 61. Tele-Track is
a subprime credit reporting service. Id.
n55. See id. at 63.
n56. See supra note 50 and accompanying text.
n57. See Peterson, supra note 9, at 890.
n58. See id.
n59. See Johnson, supra note 8, at 32.
n60. See id. at 35-36.
n61. See id. at 36.
n62. See id. at 38.
n63. 15 U.S.C. 1606.
n64. See Johnson, supra note 8, at 38-39.
n65. See id. at 40. 84% of payday lenders failed to
cite the APR of their loans in advertisements as
specifically required by the Truth in Lending Act.
Id.
n66. See Peterson, supra note 9, at 898.
n67. See id.
n68. See id. at 895.
n69. See id. at 896.
n70. See id. at 898.
n71. See id. at 894.
n72. See Lynn Drysdale & Kathleen E. Keest, The
Two-Tiered Consumer Financial Services Marketplace:
The Fringe Banking System and its Challenge to
Current Thinking About the Role of Usury Laws in
Today's Society, 51 S.C. L. Rev. 589, 610 (2000).
n73. See id.; Brusch, supra note 8, at 1281-82.
n74. See Johnson, supra note 8, at 78.
n75. See Johnson, supra note 8, at 86; see also
Drysdale & Keest, supra note 72; Brusch, supra note
8, at 1281-82.
n76. See CFRL, supra note 8; Fox, supra note 9.
n77. See supra notes 30-75 and accompanying text.
n78. See Richard Craswell, Freedom of Contract, in
Chicago Lectures in Law and Economics 83 (Eric A.
Posner ed., 2000).
n79. See id.
n80. See Douglas G. Baird et al., Game Theory and
the Law 11 (1994).
n81. See Karl E. Case & Ray C. Fair, Principles of
Economics 105 (Custom UNC Chapel Hill ed. 2002)
[hereinafter Principles].
n82. See id. at 194.
n83. See id. at 108-109.
n84. See generally id. at 48, 108-109, 143, 151.
n85. See id. at 53.
n86. See Fact Monster: Economic Rent, at http://www.factmonster.com/ipd/A0420744.
html (last visited Jan. 5, 2005).
n87. See generally Principles, supra note 81, at 48,
108-109, 143, 151.
n88. See Baird, supra note 80, at 172.
n89. See generally Principles, supra note 81, at
199.
n90. See id.
n91. See id. at 134.
n92. See id. at 215.
n93. See id.
n94. See Baird, supra note 80, at 165.
n95. See id. at 172.
n96. See id. at 172-175.
n97. See id.
n98. See Schaaf, supra note 23, at 356.
n99. See supra text accompanying note 96.
n100. See Peterson, supra note 9, at 891-892.
n101. See generally Craswell, supra note 78, at 88.
n102. See supra text accompanying note 96.
n103. See generally Craswell, supra note 78, at 88.
n104. See supra text accompanying notes 57-71.
n105. See Peterson, supra note 9, at 896.
n106. See generally Craswell, supra note ,. at 89.
n107. See generally id.
n108. See Principles, supra note 81, at 245.
n109. See infra notes 110-113 and accompanying text.
n110. See generally FDIC, Guidelines for Payday
Lending, at http://www.fdic.gov/
regulations/safety/payday/ (last visited Nov. 11,
2004).
n111. Ben Jackson, More Banks Pitching Alternatives
to Payday Loans, Am. Banker, Dec. 22, 2004, at 1.
n112. See Barr, supra note 9, at 182.
n113. See Peterson, supra note 9, at 896.
n114. See, e.g., Schaaf, supra note 23, at 349.
There are higher transaction costs associated with
underwriting and servicing payday loans compared to
other forms of credit. See Barr, supra note 9, at
155 ("Payday loans, unlike credit cards, require
lenders to interact face-to-face with borrowers each
time they originate a new payday loan. They need to
conduct more follow up with borrowers than other
lenders, and must charge enough to cover loan
losses.") Also, these loans are perceived as riskier
than more standard loans. See Financial Service
Centers of America, White Paper: The Consumer's
Choice: The Role of Deferred Deposit Servs. in
Meeting Short Term Fin. Needs, available at http://www.fisca.org/whitepaper.htm
(last visited Nov. 29, 2004) [hereinafter White
Paper]. Contra Center for Responsible Lending, Fact
versus Fiction: The Truth About Payday Indus.
Claims, at http://www.responsiblelending.org/payday/
factfiction.cfm (last visited Oct. 31, 2004)
[hereinafter Fact vs. Fiction].
n115. See Fact vs. Fiction, supra note 114. This
claim is supported by the fact that payday lenders
have losses of only 1-1.3% of accounts receivable;
See Barr, supra note 9, at 150. While Wachovia
claimed a 1.35% loss of accounts receivable from
December 30-June 30, 2004. Wachovia Corp., Second
Quarter 2004: Management's Discussion and Analysis
Quarterly Financial Supplement 1 (2004) [hereinafter
Wachovia Report].
n116. See supra notes 33-34 and accompanying text.
Interest margin refers to the difference between the
interest that the lender earns from loaning out
money and the interest that the lender pays from
borrowing the money he loans out. See generally
Wachovia Report, supra note 115, at 1.
n117. See Regarding Payday Loans, supra note 34. For
instance, Wachovia reports a return on equity of
only 15.49%. Wachovia Report, supra note 115, at 1.
n118. See generally supra text accompanying notes
83-87.
n119. See generally Brusch, supra note 8, at 1259,
1274.
n120. See infra notes 121-151 and accompanying text.
n121. See Brusch, supra note 8, at 1259.
n122. See id.
n123. 12 U.S.C. 85 (2000) (national banks); 12 U.S.C.
1831d (2000) (state banks).
n124. 12 U.S.C. 85 (granting federal preemption to
national banks); 12 U.S.C. 1831d (granting federal
preemption to state banks).
n125. See Brusch, supra note 8, at 1262. For
instance, North Carolina law limits the interest
that could be charged on small consumer loans at
16%, N.C.G.S. 24-1.1 (2000), but banks can escape
these limits by locating in a state that does not
have similarly restrictive usury laws. See Brusch,
supra note 8, at 1262. For a more in depth
examination of preemption, exportation, and charter
renting see Darrell L. Dreher & Deborah Freye,
Continuing Challenges to Interstate Lending by
Depository Institutions, 57 Bus. Law. 1297, 1297
(2002); Elizabeth R. Schiltz, The Amazing, Elastic,
Ever-Expanding Exportation Doctrine and Its Effect
on Predatory Lending Regulation, 88 Minn. L. Rev.
518, 622 (2004); James J. White, The Usury Trompe
l'Oeil, 51 S.C. L. Rev. 445 (2000); Tasha L.
Winebarger, Comment, The Beginning of the End: The
Demise of Bank Partnerships with Payday Lenders, 7
N.C. Banking Inst. 317 (2003); Elizabeth Willoughby,
Recent Development, Bankwest v. Baker: Is it a
Mayday for Payday Lenders in Rent-a-Charter
Arrangements?, 9 N.C. Banking Inst. (forthcoming
April 2005).
n126. See Barr, supra note 9, at 151.
n127. See id.
n128. See OCC Ann. Rep. 17 (2003); Fox, supra note
9, at 17. The Office of the Comptroller of the
Currency has prohibited National banks from charter
renting; the Fed has prohibited State banks that are
members of the Federal Reserve System from charter
renting; the Office of Thrift Supervision has
prohibited savings associations from charter
renting. Id.
n129. See Fox, supra note 9, at 14.
n130. See id.
n131. Bankwest, Inc. v. Baker, 324 F. Supp. 2d 1333
(N.D. Ga. 2004). See Willoughby, supra note 125, at
21-22.
n132. Bankwest, Inc., 324 F. Supp.2d at 1351.
n133. Ga. Code Ann. 16-17-1(c) (2004).
n134. See Willoughby, supra note 125, at 21.
n135. See supra notes 128-134 and accompanying text.
In addition, if the FDIC did prohibit charter
renting, this would provide banks with an
opportunity to enter the payday lending market with
no competitors since the payday lenders would be out
of business. See generally supra text accompanying
note 130. Since banks do not charter rent, having
independent bank charters themselves, they would
still be able to operate even with usury regulations
limiting the interest rate to below the efficient
market rate. See generally supra text accompanying
note 124.
n136. A prohibition on emergency credit options will
only hurt the most vulnerable borrowers by
increasing the rates at which they must borrow,
because a prohibition on the sale of a commodity
creates a black market. See Principles, supra note
81, at 64. Interest rate caps below the efficient
market rate would completely stop payday lending by
legal lenders. See id. at 108-109. However, when a
certain commodity is completely unavailable through
legal channels because of regulation, the demand for
that product still exists. See generally id. If an
individual has a need for credit, be it an emergency
or otherwise, that individual will either fulfill
this need by obtaining the credit that is available
or will suffer a deprivation. See generally id. at
64. This leads to the formation of a black market
that offers the product at rates that are even
higher than those that would be offered if the
market were unregulated. See id. Although this is
undesirable, attempting to deny credit to all
consumers in this segment of the market hurts the
consumers with legitimate credit needs and it
potentially does not help those who abuse credit
since these individuals may also resort to the use
of the black market to fulfill their credit demand.
See generally Principles, supra note 81, at 64.
n137. When interest rates are above the efficient
market rate, interest rate caps that are below what
is currently being charged but at or above the
efficient rate will not prohibit loans to that
segment of the market entirely, but will only
decrease the price of these loans. See supra note
136.
n138. See generally Principles, supra note 81, at
48, 108-109, 143. This prediction would have to take
into account the costs of doing business, the
overall risk of the subprime market, the general
return on capital in the credit market as a whole,
and potentially other factors as well. See generally
id. Further, regulators would have to be able to
adjust the interest rate cap based upon fluctuations
in the efficient market interest rate. See generally
id.
n139. See generally id. at 197.
n140. Truth in Lending Act, 15 U.S.C. 1601-1667f
(2000).
n141. See Peterson, supra note 9, at 881.
n142. See id. at 901.
n143. 15 U.S.C. 1638(a) (2000).
n144. 12 C.F.R. 226.17(b) (2004).
n145. See supra, text accompanying notes 57-71.
n146. See Gavin v. Koons Buick Pontiac GMC, Inc., 28
Fed. App. 220, 222 (4th Cir. 2002); Spearman v. Tom
Wood Pontiac-GMC, Inc., 312 F. 3d 848, 851 (7th Cir.
2002).
n147. Baker v. Sunny Chevrolet, Inc., 349 F. 3d 862
(6th Cir. 2003).
n148. Id. at 869. Statutory damages accrue
automatically when a sufficient violation of TILA is
found. Thomas A. Wilson, Comment, The Availability
of Statutory Damages Under TILA to Remedy the Sharp
Practice of Payday Lenders, 7 N.C. Banking Inst.
339, 345 (2003). On the other hand, actual damages
require proof of actual harm as a result of the
disclosure violations, which may be more difficult
to prove. Id.
n149. See supra text accompanying notes 57-71.
n150. Peterson, supra note 9, at 902 (citing Emery
v. Am. Gen. Fin., Inc., 71 F. 3d 1343, 1346 (7th
Cir. 1995)).
n151. See Elwin Griffith, Searching for the Truth in
Lending: Identifying Some Problems in the Truth in
Lending Act and Regulation Z, 52 Baylor L. Rev. 265,
352 (2000) (arguing that a stronger TILA would help
consumers in general); Wilson, supra note 148, at
352 (suggesting that a stronger TILA would provide
greater access to statutory damages and this would
help consumers).
n152. See Jackson, supra note 111.
n153. See infra notes 176-181 and accompanying text.
n154. See Barr, supra note 9, at 182.
n155. See supra notes 108-113 and accompanying text.
n156. See infra notes 157-204 and accompanying text.
n157. If consumers can price shop, this will help
fix the market failure. See Principles, supra note
81, at 201.
n158. See id. at 94. Even if consumers can price
shop, payday lenders profit from the structure of
their loan and so providing alternatives will help
facilitate the process of fixing the objectionable
qualities of payday loans by allowing substitution
away from the payday loans. See id.
n159. See id. This kind of advertisement would help
break the perception of many borrowers that they
could not get credit from a bank. See Barr, supra
note 9, at 183.
n160. See supra text accompanying note 112.
n161. Kathleen C. Engel & Patricia A. McCoy, The CRA
Implications of Predatory Lending, 29 Fordham Urb.
L.J. 1571, 1600 (2002). The Community Reinvestment
Act rates how well a bank has been serving the
credit needs of the community and having a high
rating is important when banks want to merge or open
new branches. See id. at 1574.
n162. See State Employees Credit Union: Salary
Advance, at http://www.ncsecu.org/ Loans/Personal/SALO.asp
(last visited Jan. 9, 2005) [hereinafter SAL
Webpage].
n163. Id.
n164. Id.
n165. Id.
n166. Id.
n167. Id.
n168. Telephone Interview with Phil Greer, Senior
Vice President of Loan Administration, SECU (Nov.
24, 2004).
n169. Net retention in earnings is analogous to
profit but since the SECU is non-profit it would be
incorrect to label it as such. See generally id.
n170. Telephone Interview with Phil Greer, Senior
Vice President of Loan Administration, SECU (Nov.
24, 2004).
n171. Id.
n172. Id.
n173. Id.
n174. Id.
n175. See Jerry Buckland et al., The Rise of Fringe
Banking Services in Winnipeg's North End: Client
Experiences, Firm Legitimacy, and Community Based
Alternatives 98-102, 107-110. (2003), available at
http://ius.uwinnipeg.ca/pdf/fringe.
banking.Chesya.pdf#xml=http://search.uwinnipeg.ca/cgi-bin/texis/webina
tor/search/xml.txt?query=fringe+banking&pr=ius&order=r&
cq=&id=41aa66967 (last visited Nov. 29, 2004)
[hereinafter Winnipeg Study].
n176. See Jackson, supra note 111.
n177. See id.
n178. See id.
n179. See id.
n180. See id.
n181. See id.
n182. See Barr, supra note 9, at 163.
n183. See id. at 164.
n184. See id.
n185. See Owen B. Asplundh, Comment, Bounce
Protection: Payday Lending in Sheep's Clothing?, 8
N.C. Banking Inst. 349, 349 (2004).
n186. See id.
n187. See supra notes 114, 154-155 and accompanying
text.
n188. See Winnipeg Study, supra note 175, at
Appendix G(C).
n189. See id.
n190. Compare Barr, supra note 9, at 150, with
Telephone Interview with Phil Greer, Senior Vice
President of Loan Administration, SECU (Nov. 24,
2004) (showing that SECU losses were 2.8% while
payday lender losses were between 1 and 1.3%).
n191. See Winnipeg Study, supra note 175, at
Appendix G(C).
n192. See Jackson, supra note 111.
n193. See generally Winnipeg Study, supra note 175,
at 169.
n194. See infra notes 195-201 and accompanying text.
n195. See supra text accompanying notes 176-180.
n196. See supra text accompanying notes 182-186.
n197. See supra note 114.
n198. See supra text accompanying note 163.
n199. See supra text accompanying note 181.
n200. See supra note 114.
n201. See Winnipeg Study, supra note 175, at
Appendix G(C). This is based on the assumption that
the employee would be able to work significantly
fewer hours and that a separate bank branch would
not be necessary to offer these loans (which yields
a savings of almost $ 35,000 to be measured against
the loan capital of $ 40,000). See id.
n202. See supra text accompanying notes 72-75.
n203. It should be noted that payday lenders report
a default rate of between 1 and 1.3%. See supra note
34 and accompanying text. Comparatively, the SECU
reports a default rate of approximately 2.8% as a
result of their direct deposit requirement.
Telephone Interview with Phil Greer, Senior Vice
President of Loan Administration, SECU (Nov. 24,
2004). The Winnipeg study assumes an even greater
default rate in its calculations. See Winnipeg
Study, supra note 175, at Appendix G(C).
n204. See Craswell, supra note 78, at 88.
n205. N.C. Gen. Stat. 24-1.1 (2004).
n206. 12 U.S.C. 85 (2002) (national banks); 12 U.S.C.
1831 d (2002) (state banks).
n207. See Schiltz, supra note 125, at 578.
n208. See supra text accompanying notes 124-127.
n209. See infra notes 210-223 and accompanying text.
n210. See OCC, Fil. 2001-6, Expanded Guidance for
Subprime Lending Programs 2 (2001).
n211. Tier One Regulatory Capital is stockholder
equity and retained earnings. See Broome & Markham,
supra note 53, at 586.
n212. See OCC, 2001-6, Expanded Guidance for
Subprime Lending Programs 2 (2001).
n213. See id.
n214. OCC, FIL. 99-10, Interagency Guidance for
Subprime Lending Programs 1 (1999).
n215. See id. at 3.
n216. See id. at 4-5.
n217. See id. at 5-6.
n218. See id. at 7-8.
n219. See OCC, Fil. 2001-6, Expanded Guidance for
Subprime Lending Programs 3 (2001).
n220. See id. at 3-5.
n221. See id. at 5.
n222. See id. at 3-11.
n223. See supra notes 209-222 and accompanying text.
n224. See Schiltz, supra note 125, at 578.
n225. See FDIC, Guidelines for Payday Lending,
available at http://www.fdic.gov/
regulations/safety/payday/ (last visited Nov. 11,
2004).
n226. OCC, FIL. 99-10, Interagency Guidance for
Subprime Lending Programs 5-6 (1999).
n227. See FDIC, Guidelines for Payday Lending, at
http://www.fdic.gov/regulations/ safety/payday/
(last visited Nov. 11, 2004); see also supra note
161.
n228. See supra text accompanying note 77.
n229. See supra text accompanying notes 157-186.
n230. See Barr, supra note 9, at 158.
n231. See id.
n232. See id.
n233. See id.
n234. Telephone Interview with Phil Greer, Senior
Vice President of Loan Administration, SECU (Nov.
24, 2004).
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