More banks may offer payday loans
Some big banks provide a product that's not quite as loathsome as a payday loan, but it's close, and it may become more widely available.
More states have capped the interest on payday loans, making that business less viable in some locations. But another business is willing to provide the desperate with a high-priced cash advance -- big banks.
Several major banks offer a product that's very similar to a payday loan, and apparently more banks (and credit unions) are looking into it.
And why not? If they can loan $100 for a $7.50 fee, that's an annualized interest rate of 261% -- less than the 400-plus% charged by many payday lenders, bankers like to point out. (It can also be much cheaper than the "overdraft protection" some bank customers opt to get, which can ding you with a $35 fee for an overdraft of mere cents.)
"In reality, direct deposit advance programs enable customers to live within their means by permitting them to manage the timing of the receipt of those means," the American Bankers Association says (.pdf file).
This is an unwelcome development in some corners. Eileen Ambrose of The Baltimore Sun says Wells Fargo may bring its direct deposit advance product to Maryland. She notes that the state's 33% interest rate cap on small loans doesn't apply to the major banks. She adds:
But this is one product that Marylanders can do without.
These loans are likely to appeal most to vulnerable consumers who live paycheck to paycheck but have run short of cash. And once consumers borrow, they often take out back-to-back loans, paying a fee each time.
But we're likely to see more of these, Ambrose adds.
"There are bank consultants out promoting these products," says Lauren Saunders, managing attorney for the National Consumer Law Center. "I fear this is going to be the next big bank abuse."
Here's how these loans work:
- You must have direct deposit with the bank, which mean you either have a job or you get Social Security or, perhaps, a disability check. About one in four of these borrowers is on Social Security, says the Center for Responsible Lending, which is alarmed about this type of lending.
- You get an advance against your next deposited check. When it arrives, the bank takes out the loan amount plus a fee for lending you the money.
- There are limits on how much you can borrow. At Wells Fargo, it's the smaller of $500 or half the amount directly deposited into your account.
- If you do this month after month, which many of these customers do, the bank may cut you off -- for a while.
These types of direct-deposit loans are available at Wells Fargo, U.S. Bank, Regions Financial, and Fifth Third Bank. We'll keep you posted as more jump on the gravy train. Post continues after video.
What's the government doing about this? The Office of the Comptroller of the Currency has issued guidelines that aren't very specific about how the banks should regulate this activity. The OCC was concerned about "the steering of customers who rely on Social Security and other federal benefits toward the loans and a failure to monitor accounts for excessive use," reports Candice Choi of The Associated Press.
The Center for Responsible Lending, which has studied this, said, "The FDIC has advised the banks it oversees not to keep customers in this high-cost debt for more than 90 days of the year. But on average, bank payday loan borrowers are caught in this cycle for 175 days."
Even a blogger at the Payday Loan Industry Blog thinks some regulation is needed. He wrote:
HOWEVER, FULL DISCLOSURE MUST BE EMPHASIZED! Complete disclosure of all terms, fees and charges in an EASILY understood format must be enforced. Insist on disclosure and let the marketplace decide what products and services offer the best solution for an individual consumer.
Should you get one of these loans? There are alternatives, including these pointed out by MSN Money's Liz Weston:
Take another job or volunteer for extra hours at work.
Have a yard sale or sell unneeded items on eBay or Craigslist.
Ask your employer for an advance.
Better yet, start now to save an emergency fund you can tap rather than borrow money at usurious rates.
More on MSN Money:
I was a banker for 36 years. I lost my job over 2 years ago because I did not agree with the way business was done or presented to clients.
When I got into the business in 1973 after graduating from college, it was you have a fiduciary responsibility to lend depositor monies in a prudent manner. This means you expect to be repaid!!! I realize there is FDIC insurance, but operating like this is insane. WE ARE STILL PAYING THE PRICE FOR THE SUB PRIME LENDING-DO WE HAVE A SHORT TERM MEMORY OR WHAT!!!
The last bank I worked for would not open accounts for "PAYDAY LENDERS". Now banks are payday lenders. I grew up in a small business and my father taught me to treat people fairly, honestly and with integrity. I am now unemployed because I was not willing to sell my integrity to do unethical and immoral business with my clients.
So be it. This industry is filled with crooks and dishonesty. I have no desire to work in the financial services industry again. Banks are not about helping people or business being successful. It is about the all mighty dollar and screw the consumer and business client.
Make sure you keep tabs on your personal or business bank accounts. The banks are doing away with the FREE CHECKING and will begin charging a monthly service charge for using a debit card. The uneducated, uninformed and lower income people are going to get raped by your friendly banker!
HOLD ON TO YOUR WALLET!!!
Oh great, just kick the people when they're down with Great White Shark mentality. Why not anyway with unemployment solved and the economy booming?
261% annual interest rates? Oh yeah, the lesser of evils and not much choice. We're definitely making history recording a new low for banks.
Never mind the $trillion plus in secret bailout public funds to the banks to save their worthless greedy butts on top of the legal stimulus welfare. Gotta love The Fed for saving us from certain financial Armageddon. Right!.
Gratitude with greed and predatory lending, just what we need now with our clueless and useless leaders silently watching and smiling as they and their banksta masters continue to play Empire.
Sure glad that our Congresspigs corrected the Banking Monolopies, (US Banking Association) addiction to screwing over the public, After all, These banking crooks are doing no more then they have paid off your Congresspigs to allow them to do to us.
Remember when we had that Hoopla over US BANKING REFORM. I think they need to go back and have the US PUBLIC write the REFORM?
Every life has a story, and there are many reasons why some people may have to use a payday loan service. Last year the company I worked for in Charlotte, NC hired a young lady from a small surrounding county where there are hardly any jobs. This young lady is separated from an alcoholic husband who had been fired from his job. She has one daughter , and the only job she could get in that small county was a part time job doing telemarketing making $8.00 an hour. She had to use the payday loan services in order to survive. She took an entry level sales position at our company starting out at $500.00 a week. It was not a lot of money, but it has helped her through some rough times, just like the
payday loans did. It is not wise to be critical of others, and that is exactly what the banks have always done, been critical of payday loan services.
Nothing like banks borrowing tax$ in bailouts then lending out again except with a lot more interest for the privilege. Gotta love this "gotcha again scheme". Even Madoff would be jealous.
BTW, none of the banks to this day has ever disclosed where the bailout money went or what it was used for and refusing to when asked. The only response was "money is fungible".
Can remember back when we used to call these outfits...
Loan Sharks...Now big banks are getting into the act..?
Times must be hard...lol
@ wac72- We were told about the changes that were coming- and tried to plan for the worst- though the original idea was far easier than what the legislators came up with. Cost of medical insurance was doubled on our behalf and all the benefits were cut to catastrophic only- copays were dropped for clinic visits and for medications. Hence the 500% healthcare costs gained.
As for roomates or other means- help only goes so far before it becomes a hinderance. I have a family of 6 and it would be hard for a roomate to deal with- especially with my kids.
As for the union- pretty much castrated without much power in a right to work state. They try but aren't very effective.
There are times I think we'll get through this mess.. then the state throws something else at us and we're sinking again. No public transportation means the 57 extra cents I pay per gallon of gas I'm stuck with. Walmart is out of the question too- over 110 miles away.
Personally- I think we need to get rid of the career polilticians or at least give them minimum wage- make them work for the decisions we are meant to abide with, and see where things go from there.
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Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
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