Big banks get into the payday loan business
Banks insist their temporary, high-interest loans aren't like those others
Several major national banks have entered a lending arena that once had been monopolized by "payday loan" shops -- small businesses that offer short-term advances on a customer's next paycheck when funds run out.
The loans offer a quick but expensive fix, with annual percentage rates that often translate to more than 300 percent.
Regions Bank is the latest major bank to do so. This spring it joined Wells Fargo, Fifth Third and U.S. Bank in offering the loans. The banks distance their services from the term payday loans, which critics say prey on the poor. They go by names such as direct-deposit advance, checking-account advance, ready advance or early access.
But, like payday loans, they often have short pay-back periods and charge hefty fees. With these bank loans, borrowers who can't pay their bills before the next paycheck or deposit typically borrow a few hundred and when the paycheck lands, the amount due and fees are automatically subtracted from their account.
High lending rates
Terms are very similar among the four banks. Three of the banks charge $10 for every $100 borrowed (Wells Fargo charges $7.50 per $100). And all four will allow only half of the customer's paycheck or $500, whichever is less -- to be advanced. The banks that report Annual Percentage Rates (APRs) list them at 120 percent. But that assumes money is lent for a 30-day cycle (10 percent times 12 months).
Consumer groups say the loans are usually for shorter periods than that -- between paychecks that come every two weeks, for instance, which ups the rate. The Center for Responsible Lending found that the average borrowing time for such a loan is 10 days.
For a 10-day loan with 10 percent fee, the APR is really 365 percent, depending on how it is calculated, says Lauren Saunders, managing attorney of the National Consumer Law Center.
"A lot of people are paid twice a month. Even if you're paid monthly, you're probably not going to take out the loan the same day you're paid -- you'll take it out at the end of the month when you're running out of money."
|Major bank 'payday' loan programs
(click on bank to go to program page)
Wolf in sheep's clothing?
The banks don't deny this is a last resort. They state on their websites that these are expensive loans and that if another less expensive resource is available to a consumer, he or she should use it. They say their loans differ from payday loans because they are less expensive, they offer a relationship-based service and have safeguards in place -- such as limits on loan amounts and limits on consecutive months of indebtedness -- to keep customers from getting in too deep.
"We think that they are very, very different" from payday loans, says Richele Messick, spokeswoman for Wells Fargo, which has been offering the loans since 1994. "At Wells Fargo, it is a line of credit that is only available to our customers who have an established consumer checking relationship and regular qualifying direct deposits. You can't just walk in off the street. We don't advertise it. It's designed to help our customers get through an emergency situation."
Consumer advocates say banks offer an unwarranted perception of legitimacy for these loans and trap desperate people on a treadmill of debt. They may also have some built-in dangers, Saunders says, in the form of late fees and having direct access to your bank account.
The Office of the Comptroller of the Currency, which regulates national banks, proposed guidelines this year for banks making such loans. But Saunders says, "That will just legitimize a terrible predatory loan by putting out guidance on how to do it." She says banks should get out of the business altogether.
So what's the alternative?
"Their best alternative is to live within their means, and not to use next month's income for this month's expenses," Saunders says. But short of that there are better options, she says: "In terms of affordable small loans, credit cards are usually under 36 percent. And there are credit unions that have small loans available."
Now the federal government will have to figure out what to do when payday loans become one of the hottest products in banking -- which is what they're going to become.
|-- Richard Bove
That availability is expanding rapidly. Low-income credit unions have nearly tripled in assets and lending and doubled in members since 2003, according to the National Credit Union Association. Today, 343 federal credit unions report more than 33,000 small loans, averaging $412 each with interest rates just below 21 percent.
Some say banks are using the high-fee product to help make up for what they're losing as financial reforms squeeze them in other areas.
Bank industry analyst Richard Bove of Rochdale Securities says there's no doubt "payday loans" are lucrative for banks, but he also says they give consumers options.
"The government has hit the banks hard in areas where revenue was a large part of income," Bove says. "Overdraft fees in particular may have been 90 percent of their non-interest income, so the net effect is banks need to get the money back. Payday loans is a beautiful way to do it.
"We know why banks do it, but is it bad for consumers? I don't think it is," he says.
Bove argues that if your choice is bouncing a check for rent or other necessities or having your utilities turned off, you may be better off with the short-term paycheck advance. With bounced-check fees from retailers and banks combined, "you may pay $105 for bouncing a $100 check," he says. In that case, the charge for borrowing a few hundred for a few weeks from a bank would be much less.
"You have to weigh the alternative that the income-stressed consumer has when forced to make a payment for which he has no money," Bove says.
Bove says Regions won't be the last major bank to offer payday loans. "We're going to see a wave of this," he says. "Now the federal government will have to figure out what to do when payday loans become one of the hottest products in banking -- which is what they're going to become."
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