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NATIONAL CENTER FOR POLICY ANALYSIS
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Feds Crack Down On Payday Loans

For the past decade the controversial practice of providing short-term loans to people between paychecks has thrived under the noses of banking regulators -- until now.

Consumer advocates say payday loans are usurious, but the industry found a way around state-imposed restrictions by teaming up with banks that hold federal charters -- institutions which aren't subject to state regulations.

However, now the Office of the Comptroller of the Currency has ordered tiny Eagle National Bank of Upper Darby, Pa., to stop providing financing for payday loans to Dollar Financial Group, one of the nation's largest loan sellers -- a practice that allowed Eagle to avoid state usury laws.

Payday loans are offered by check-cashing companies, pawn shops and independent companies that don't have banking licenses.

Typically, a customer borrows $200 to $500 and pays it back when their next paycheck clears.

In return, the borrower is charged a hefty fee, which on an annualized basis totals an interest rate that can range from 250 percent to 1,000 percent.

The amount of payday loans has risen from virtually zero in the early 1990s to about $15 billion now.

Currently, about a dozen banks offer financing payday loans to much larger check-cashing outlets.

Source: Paul Beckett, "U.S. Moves Against Payday Loans, Which Critics Say Are Usurious," Wall Street Journal, January 4, 2002.

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