Valley community bankers say payday loans a no-go

Local community bankers in near unison shoot down any consideration for the plea made by former Consumer Financial Protection Bureau Deputy Director Raj Date for banks to provide an affordable payday loan system.

The consensus opinion of the Central Valley banking industry is that restraints placed on the banks would make any form of payday lending a losing venture.

“There isn’t a big demand for it, for one thing, but then you would also have every regulator looking over your shoulder,” said Mike McGowan, Premier Valley Bank president and CEO.

Date explained at the Underbanked Financial Services Forum two weeks ago he believes the banks’ sophisticated operating systems and data sets would allow them generate a profit at high interest rates, but still significantly lower than the payday lenders. 

"It's a real thing, and it's a real need, and it is pretty inefficiently provided today," Date stated.

The average payday loan fees are $15 per $100 lent that is due every two weeks. If the loan isn’t repaid in that period, the borrower is charged another $15 due in another two weeks for an average annual percentage rate of 391 percent.

Despite the overwhelming fees, bankers do not believe they could make a profit because they simply cannot operate the same as payday lenders.

Payday lenders are not considered banks, and they are not as closely scrutinized or highly regulated as are traditional lending institutions. Each state has its own payday loan regulations.

From a business viewpoint, Doyle doesn’t see a way banks could offer small, short-term loans while meeting all the regulations and accounting for all the computer system and labor hours required to make that loan.

“It sounds great. and it’s a great concept and we would love to do it, but we can’t figure out how to make it reality to offer small loans while making a profit,” Doyle said.

The only way Doyle could imagine banks offering payday loans would be if they were excluded from the regulatory issues associated with their other transactions.

Another part of the reason payday loans are so profitable is because the minimal time spent screening each applicant, which raises the risk of default. To accommodate the risk, the lenders charge exorbitant fees.

Because of irresponsible lending practices prior to the recession, banks now scrutinize each loan even more thoroughly to determine credit-worthiness. At this point, the banking industry would not be willing to shorten the screening process to offer such small-dollar amount, high-risk loans.

“It’s always being tossed around. They’re always encouraging us to find ways to provide affordable cost of funds, but it’s just not a viable option,” Doyle said.

However, the bankers also acknowledge that the undesirable terms and conditions of payday loans are a concern.

“You have to ask are they being taking advantage of? And yeah, I’d say they are,” said Roy Estridge, Valley Business Bank’s executive vice president, chief financial officer and chief operating officer. “People get caught borrowing money to cover more debt and it starts snowballing.”

A study released in February by the Pew Charitable Trusts reported 76 percent of all payday loans are renewals.

Each of the bankers indicated they would recommend overdraft protection or a credit card application to their customers over seeking out a payday lender.

However, Doyle also acknowledges payday loans have established a niche role in the lending equation.

“For some people, it may serve a purpose and apparently it has to some degree because there are a lot of them,” Doyle said about the current payday lending system.

The Pew study estimated 12 million U.S. citizens take out payday loans every year, spending $7.4 billion in interest, with the average borrower encountering $520 in interest costs.