Who Is The Real Predator?

We are seeing a great deal of discussion about the evils of many kind of lending, and the evils of many financial industry practices. Basically, anything that is known to or believed could harm consumers comes under criticism.

There are the high-interest rate loans offered by finance companies. Consumer advocates have urged banks to make these loans so borrowers could get better rates - banks rates. Never mind the fact that bank rates are lower because they make lower risk loans. If banks made higher risk loans, their rates would have to go up to cover the risk.

Then there is loan flipping and loan churning. The practice of encouraging or deceiving customers into refinancing a loan leads to profits for the lender who gets the refinancing fees and costs for the borrower who pays the fees and probably didn't need to. The bank regulatory agencies have issued several pronouncements advising financial institutions to avoid loan flipping and churning.

Other products fall into the same questionable basket. Payday lending is under hot debate. Borrowers take out short-term small-amount loans for a fixed fee that results in an APR that consumer advocates and regulators think exorbitant.

And then there is bounce protection, a carefully designed method (deviously designed say consumer advocates) to increase fee income - at the expense of the customer. The institution covers the check, enabling the customer to avoid the fees and reputation problems with the check's payee. But the institution profits from the fees that it imposes for the service.

But take a look at the flip side. There is a reason why these allegedly evil or predatory practices exist: people need them. People, for a variety of reasons, need the types of loans that may also cause harm. Anyone living on a budget with limited flexibility has occasion to need help stretching from one paycheck to the next. That help is hard to find and certainly not available at a low cost.

Consider the consumer who has a credit card payment due before the next paycheck, but an emergency visit to the doctor for a child with an ear infection used up the funds that had been set aside for the credit card payment. This consumer has several choices. She can make the credit card payment late and incur a fine of $35. Or she can borrow funds from a payday lender for $17.50. Another option is to bounce a check. The cost of this depends on whether there is any overdraft protection on the account and what that costs. If there is no overdraft or bounce protection, she will end up paying both her bank and the credit card company a fine for a returned check. On top of that, the payment is late so she still has that $35 late payment fee.

Both bounce protection and payday lending have come under severe criticism because of the cost of the products and the harm they can do to the unprepared consumer. But they also serve an important purpose - helping the customer make ends meet and avoid charges imposed because of cash flow problems.

There is a need for products that help low-income customers through tough times. The trick is offering products that help meet qualified and real credit needs without doing so in a way that drives the customer into unmanageable debt. There are plenty of examples of predatory lending practices - so many, in fact, that when we get on this topic, we assume that any lender offering such products must be a predator.

The banking industry has the opportunity to design and offer products that meet these special consumer needs without being unfairly predatory. This means pricing and terms to cover risk while avoiding pricing that takes unfair advantage of the customer. It also means consumer education. It means being responsive in a positive way to the credit and banking service needs in your assessment area. It means not simply jumping on a bandwagon because it happens to be passing through.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 8, 8/03