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Federal Government; Payday Loans Cheaper Than Overdrafts

Monday, 08 December, 2008.

The Federal Deposit Insurance Corporation (FDIC) published the results of a two year study on the use of overdraft programs operated by FDIC-supervised banks. The study found that a typical NSF check can result in overdraft fees and interest in excess of 3,500 percent APR. In addition, the study found that customers in low-income areas (median annual income of less than $30,000) were nearly twice as likely to incur these charges.

The FDIC study reinforces the payday loan industry’s position that short-term cash advance loans are significantly less expensive than traditional bank overdraft fees. The study also found that, unlike payday loan companies that offer on-demand products, most banks (75.1 percent) automatically enrolled customers in overdraft programs that carry APRs and other fees far more expensive than the typical cash advance loan.

The FDIC study concluded that a typical bank customer repaying a $20 overdraft in two weeks would incur a $27 overdraft fee (the survey median) at an APR of 3,520 percent. A customer repaying a $60 ATM overdraft in two weeks would incur an APR of 1,173 percent and a customer repaying a $66 check overdraft in two weeks would incur an APR of 1,067 percent. Surprisingly, the study also concluded that the faster a customer repays an overdraft, the higher the resultant APR.

Consumer advocacy groups like the Center for Responsible Lending (CRL) have lobbied to ban payday lending, leaving consumers with no option other than to pay overdraft fees to banks and credit unions. CRL and others recently led the charge to pass HB 545, a law effectively banning payday lending in Ohio (see story). Rent-A-Center led a coalition of companies in an unsuccessful attempt to block HB 545 (see story). In 2006, Ken Compton, CEO of Advance America, said, “Contrary to the CRL’s spin, responsible uses of the payday product provides consumers firm footing to overcome unexpected financial circumstances”.