For 69-year-old Annette Smith, a short-term loan from her bank seemed like an easy way out of debt. But it didn't turn out that way.
Smith, a former business owner from California, was in a a financially hopeless situation after falling victim to an identity theft scam. So, she said, she felt she had no choice but to turn to her local bank for an advance deposit, a type of payday loan in which a small amount of money must be repaid quickly, and usually in full.
Advance deposits are offered by a few mainstream banks, such as Wells Fargo. Repayments are taken directly out of the borrower's bank account, usually a month after the loan is made. Taking an advance deposit, or a payday loan, is a common practice for people who are in financial need, according to the Senate Special Committee on Aging.
The problem for borrowers is that the high fees can often put them in a financial trap.
"Any time that I tried to not borrow again, or to borrow less, the bills and expenses I couldn't pay would catch up to me a month or two later," Smith said at a payday lending hearing held by the Senate Special Committee on Aging this week. "I was back where I started."
According to a report by the Pew Charitable Trusts, Smith is just one of 12 million American adults who use payday loans each year. Like many, she relies solely on her Social Security check to survive day to day. The Center for Responsible Lending recently released a report showing that one in four users of bank payday loans is a Social Security recipient, making this growing issue very relevant for seniors.
"Payday loans are usually made without 'underwriting' - in other words, without a credit check or other attempt to determine the borrower's ability to repay," Sen. Susan M. Collins., R-Maine, said at the hearing.
That means that many borrowers end up being individuals who are unable to repay the money and additional loan charges.
"Too often, borrowers who get trapped in a cycle of debt are then subjected to aggressive - even abusive - collection practices by some payday lenders," said Committee Chairman Bill Nelson, D.-Fla.
Over the course of five years, Smith took out 63 loans and accumulated nearly $3,000 in fees. "It was horrible and I thought there was no way out," she said. "But then I realized I couldn't be the only one."
Committee Chairman Bill Nelson, D-Fla. said, "One thing is clear: Millions of Americans with poor or no credit have a need for money in emergencies. But how can we make sure that the products available to these people, especially the seniors, won't trap them in a cycle of debt?"
At this week's hearing, Collins suggested that two bank regulators - the Federal Deposit Insurance Corporation (FDIC) and the Office of Comptroller of the Currency (OCC) - complete their proposed guidance on requiring banks to inspect customers' income and expenses prior to lending money. That would help eliminate some of the borrowers who would not be able to repay their debt. The committee also called upon the Federal Reserve Board to supervise and regulate banks that offer the loans to make sure they monitor and limit the number of loans a person can obtain.
Today, Smith is out of debt and does not owe money to her bank. But she hopes the lenders are brought under tighter regulation. And, she said, she is devoted to making sure others don't make the same financial mistakes she did.
"Please do something," she told the committee on Wednesday, "whatever you can, to stop banks from doing this to other seniors across the country."