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Banks' payday loans under fire

Consumer watchdogs want to stop banks from offering short-term, high-cost advances on paychecks and other direct deposits.

By MSN Money Partner Mar 6, 2012 2:42PM

This post comes from Jeanine Skowronskiat partner site MainStreet.

MainStreet on MSN Money


Overdraft protection may be at the center of the Consumer Financial Protection Bureau's inquiry into checking account practices, but consumer advocacy groups have another banking product they'd like the bureau to immediately examine.


Nearly 250 advocacy groups petitioned federal regulators last week to stop banks from offering deposit advance loans. The product in question is one many consumers are unfamiliar with. Here's a breakdown of what you should know about the issue.


What are they?

Deposit advance loans essentially allow checking account holders to get an advance on an electronically deposited paycheck or qualified direct deposit. They are offered in some incarnation at four major banks: Wells Fargo calls it Direct Deposit Advance; US Bank calls it Checking Account Advance; Regions Bank, which operates in 16 states, calls it Ready Advance; and Fifth Third Bank, which operates in 12 states, calls it Early Access.


These loans are offered on a short-term basis and generally must be repaid through the consumer's next direct deposit or within 35 days of the advance. They're also expensive.


US Bank, Fifth Third Bank and Regions Bank each charge the equivalent of $2 for every $20 advanced, and Wells Fargo charges $1.50 for each $20 advanced. When you run the numbers, this works out to annual percentage rates of 120% and 90%, respectively.


Advocates assert that the high costs associated with these short-term loans are similar to those being offered by payday lenders.


"These products are designed to trap people," says Kathleen Day, spokeswoman for the Center for Responsible Lending, the nonprofit group that spearheaded the petition. Day said an analysis of actual checking account activity conducted by the CRL found that consumers taking out these advances stay in debt for 175 days per year, despite the fact that the loan must be paid back in a month.


Comparatively, an average payday borrower is in debt for 212 days. (Post continues below.)

Why these are under fire now

In most instances, the loans are not new. Wells Fargo has actually offered Direct Deposit Advance since 1994, while US Bank and Fifth Third introduced their products in 2006 and 2008, respectively.


Regions introduced Ready Advance last May. A month later, the Office of the Comptroller of the Currency proposed guidelines addressing bank deposit advance loans, a move the CRL says inadvertently legitimizes what it believes is a predatory product.


"A year ago the industry didn't have the green light to pursue this," Day says. She adds that Fiserv, a provider of software systems to the financial industry, recently launched a product called Relationship Advance, which allows banks to provide credit to help bridge short-term deficits. "We're trying to stamp out (the service) before it comes widespread," she says.

What the banks are saying

Banks that currently offer deposit advance loans say there are several distinctions that make the product different from a loan you could get from a payday lender.


"We put in place strict limits and protections to help customers avoid becoming overextended," says Teri Charest, a spokeswoman for US Bank.


This includes limiting how long a customer can use the option, enforcing a mandatory cooling-off period (meaning the person must go a certain time without using the loan) and providing information about alternative, low-cost credit options that may be available.


Similar restrictions are in place at the other financial institutions offering the service. For instance, Regions reports the repayment history to the credit bureaus, which helps customers establish or build their credit. Wells Fargo does not report its data to credit bureaus, while US Bank and Fifth Third did not respond for comment on this practice.


All four banks also point out that the product is not meant -- or marketed -- for mass consumption.


"You're never going to walk into a store and see a poster about this product," says Richelle Mesnick, a spokeswoman from Wells Fargo. "It is designed to get a customer through an emergency situation."


What happens next

Banks offering deposit advance loans don't have immediate plans to amend them, as they say it serves a need among their customers.


"There is a need for short-term credit quickly," Mesnick says.


The Consumer Financial Protection Bureau has not responded directly to the consumer watchdog petition but has said it will include these products in its inquiry into payday lending that is under way. Deposit advance loans are actually named specifically in the bureau's examination document (.pdf file) that outlines what products and services the agency will regulate.


Banks reiterate that the product should be used only in emergency situations, while consumer advocates advise people to avoid the product entirely.


"It's not something that really helps," Day says. "People should stay away from them."


More on MainStreet and MSN Money:

Jul 23, 2012 5:14PM

How deceptive is this article!!!  Oh Yeah just through in the name PAYDAY LOANS and people are all over fighting the banks now for their products of a "small loan"    Do any of you rich folks get it that not everyone is able to get a regular loan at their banks?  Do you not get it that we all have emergencies at some point are in need of a little cash now and then and that it is our right to BORROW!!!!!!!!!

I BET THE ACTUAL FEES ON THESE BANK LOANS IS ACTUALLY LESS THAN $20 A MONTH FOR $300.  NOT $20 per hundred!!!!!  Do your math folks before you hang someone else up to dry!!!!!


Jul 24, 2012 2:41AM
it is stilling to the costumer when they charge 40%  of interest, if the person borrow because they are having a crisis, how are they going to payback ,if the interest is almost half of the loan.
Mar 7, 2012 3:10PM
The loan can’t possibly reach the absurd 400% apr these groups are calculating if the repayment is automatic. $10 for $100 is a loan at 10%, and that is better than the credit cards these banks offer. 
Jul 23, 2012 4:41PM

If banks would give people with fair credit loans, then we wouldn't have these problems. Think about it, those who take payday loans usually pay these off because they want some sort of security for emergencies. If it wasn't for these companies our economy would be even worse. They give opportunities to those who have no where to go. Shame on you banks, credit unions and finance companies, which refuse to give help to people who are struggling financially. Minorities have less than a chance to get loans. Wonder why?

Jul 23, 2012 5:55PM

It's about time, that Fed's. took time to find out that these legal crooks are stealing from the consumer.

I often wonder why it takes so long to realize what these legal thieves with charters, have been doing to the consumer.

Mar 8, 2012 10:00AM

Where did you see 400%? 


And that is 10% per month.  There are 12 months in a year so the APR comes out to 120% as stated in the article.  It is a total rip off...banks taking advantage of their customers again.  Switch to a credit union, they are much better than a bank and charge lower rates for loans.

Jul 23, 2012 3:44PM
 120% is only if you get paid monthly.... If you get paid weekly,$2.00 per $20.00 borrowed can add can easily pay 40% per month or 520% APR.
Jul 24, 2012 6:30PM
Ok I am an employee- branch manager of a Pay Day advance place. I help people everyday save themselves from over draft fees and red light tlcket fines and tire blow outs or the eletric bill was higher then they thought ..the  unexpected reality of life ect ect. I have delt with many different walks of life. I think shutting them down for 1 is going to put even more people out of a job.  2were are  people going to do or go when they dont or cant get credit through a bank. Its ment to be a short tem loan yes and some people cant seem to figure out how to get out.  But that is where i come in I come up with some solution to help..We are differnet then the other guys, we will help them get out of the loan. Were not out and never have been out to screw people out of their money. For god sakes i have had a dentist and an attorney as clients! Even my mother in law is a Vp of a local bank and has told me she completely understands what i do and why we do it, She has also told me that if the loan isnt worth their time or not enough money into it they deny it . Nobody has any idea  how many people thank me on a day to day basis. Not all of us PAYDAY places are bad and we are not bad people. People need to walk in other people shoes before opening their mouths about shutting places down.
Jul 23, 2012 8:18PM
only a moron would use payday loans.or title loans if you are that stupid then you deserve what you get.I dont care what the situation is ..only a MORON!
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