Lone Star Liberty

If bank–payday lender partnerships are terminated by bank regulators, the industry will have to withdraw to the approximately thirty states where payday lenders can operate profitably under state laws. Given its large size, the industry would undoubtedly launch a major lobbying campaign to change the laws in states where the industry cannot operate profitably and to pressure the federal bank regulatory agencies to take a more benign view of bank–payday lender partnerships.Another threat to payday lending comes from the development of payday-loan-like overdraft programs that large numbers of community banks and credit unions have begun to offer in recent years.

These programs carry such trademark names as "Bounce Protection," "Overdraft Privilege," or "Courtesy Pay," and are marketed to banks by firms that help the banks implement and manage the programs. A bank that offers an overdraft privilege informs selected customers that it will honor NSF checks as long as customers do not overdraw their ac-counts by more than a specified amount, such as $300. Each time the bank honors one of these checks, it charges its standard "over-draft fee," typically $20 to $25. The bank requires that the customer return the account to a positive balance within a relatively short time, commonly thirty days.'" Some banks impose a fee of usually between $2 and $5 for each day that an account carries a negative balance. Because the fee income can be significant, banks encourage their eligible customers to make use of the service whenever they need it. As far as I am aware, banks and bank regulators have provided no data to date indicating the extent to which customers who use the overdraft privilege do so frequently. Effectively, the overdraft privilege is a short-term loan.

The banks offering the service claim that it is not a credit product and that there is no finance charge, simply an overdraft fee. The overdraft fee is much higher than what the banks would earn in finance charges on a line of credit, enabling the banks to offer the product to customers with higher risk profiles. A customer might, for example, write an NSF check for $100 that the bank honors while charging a $20 over-draft fee. If the customer returns the account to a positive balance within two weeks, the fee equates to charging a 520 percent annualized interest rate." Some payday lenders say they do not see the entry of banks into this market as particularly threatening. In the case of the overdraft privilege, they argue that their finance charges are often lower than the banks' overdraft fees. In theory, someone with a $300 limit on an overdraft privilege could write one overdraft check for $280 and incur only a $20 fee. Most payday lenders would charge somewhat more than $45 for a $280 cash advance. In practice, however, many customers may overdraw their accounts by writing several smaller checks, such as three checks for $65 each. In this case, the fee for the overdraft privilege would aggregate to $60 for a $195 advance, well over what payday lenders would charge.

Other payday lenders do worry about the spread of payday-loan-like overdraft policies. They point out that even if the bank overdrafts carry higher finance charges than their own loans, they are more convenient because the customer simply writes an NSF check and does not need to visit a payday loan office. These lenders worry that they could lose some of their most creditworthy customers to the banks and credit unions offering payday-loan-like overdraft programs.

Changes in Pawnbroking When Fringe Banking was published, the pawn-broking industry was growing rapidly. Recent data indicate that this growth continued until about 1997. In many states, the number of pawnshops actually declined between 2000 and 2002.