rssWatchdog Group Raises Alarm Over ‘Payday Loans’ at Mainstream Banks
Monday, April 05, 2010 at 6:00 am
- 53 Comments
A customer applies for a payday loan in Sacramento. (The Sacramento Bee/ZUMA Press)
Increasingly, mainstream banks are offering products similar to payday loans — short-term, high-interest loans secured by a pending paycheck — according to a consumer group that called on the Office of the Comptroller of the Currency to stop the practice.
Banks including Wells Fargo and U.S. Bank are giving customers advances on their paychecks, typically for a fee of $10 per $100 borrowed, which translates to an annual percentage rate of 120 percent or higher, if repaid in under one month, according to a report by the Center for Responsible Lending.
[Economy1] “These products ensure that many borrowers will end up trapped in cycles of debt,” the report stated. “Unless the OCC and other bank regulators take action with regard to bank payday loans, these products will likely proliferate throughout the banking industry as financial institutions look for new sources of fee income.”
In recent years, several states have cracked down on payday lending, which typically operates out of simple storefronts. Fifteen states and the District of Columbia prohibit triple-digit interest rates on loans to consumers, according to the Center. But national banks are subject to regulation by the OCC, a part of the U.S. Treasury Department, and thus evade the limits. Consumer advocates are particularly concerned about Wells Fargo extending the reach of the products through its recent acquisition of Wachovia Bank.
Wells Fargo defended its loan product as a service to existing customers caught in an emergency, whose high cost is fully disclosed and complies with state and federal law.
“Wells Fargo does not consider our Direct Deposit Advance Service ‘exploitative’ nor is it a ‘payday loan,’” spokeswoman Richele Messick said in an email response to questions. “We reach out to customers at all stages of their usage of the service, reminding them of the expense of this product and encouraging them to seek less expensive alternatives.”
A U.S. Bank spokeswoman didn’t respond to requests for comment.
In 2000, the OCC stopped national banks from partnering with payday lenders, the Center said, calling on the agency to crack down on banks that are now directly making these kinds of loans. The OCC should also gather information on bank customers’ usage of these products and the impact on minority communities, which are disproportionately affected by payday lending, the report said.
The OCC doesn’t have a problem with national banks offering this type of loan, spokesman Dean DeBuck said.
“It’s not a payday loan. It’s available through banks and bank branches. It’s something you don’t get at a storefront,” DeBuck said. “This is a product that is offered to customers and they don’t have to use it. If it works for them, fine. If it’s not suitable for them, they can find something else.”
Here’s how the Wells Fargo and U.S. Bank products work, according to the Center. A banking customer who is signed up for direct deposit of at least $100 every 35 days may take an advance of $500 or half of the monthly direct deposit income, whichever is less. The funds are automatically repaid from the incoming direct deposit funds or existing balance.
A key problem is that the bank doesn’t evaluate the customer’s ability to repay the loan, as it would with a mortgage or consumer loan, Center spokeswoman Kathleen Day said.
“It’s not a good idea to lend money to someone that they can’t afford to repay,” Day said. From the customer’s perspective, “it would be better to take a $100 cash advance and pay it back over the year because you’d only be paying a double-digit APR.”
The OCC is primarily concerned with the safety and soundness of national banks, which actually improves when the banks make more money off their customers, noted David Min, associate director for financial markets policy at the Center for American Progress, a progressive think tank.
“The prudential regulators don’t necessary care as much if the consumers are being misled,” Min said. “They’re not always going to be a good consumer protection regulator.”
In a separate report, the Center said overdraft programs at national banks are among the worst in the industry and called on the OCC to curb abuses.
“Most national banks have adopted automated overdraft systems through which the bank routinely lends accountholders the money to cover any transaction — including those conducted with debit cards that customers often would prefer not to be covered,” the report said. “Banks charge a fixed fee averaging about $34 per incident and engage in a number of abusive practices that help to maximize overdraft fee revenue.”
The Center’s review of the 13 largest national banks, which hold about 80 percent of the $4 trillion deposits at U.S. national banks, found that the banks automatically enroll customers in the highest-cost overdraft program available, despite having lower-cost alternatives, and allow multiple overdraft fees to be charged in a single day.
In response to concerns about overdrafts on debit card use, the Federal Reserve approved new rules that take effect in July, requiring banks to opt in customers to any overdraft fees charged on ATM withdrawals or one-time debit card transactions. Bank of America earlier this month announced it will block any debit card transactions that would overdraw a customer’s account, to avoid charging an overdraft fee.
Katherine Reynolds Lewis is a Washington-area writer specializing in finance, work and family issues, whose work appears in the Fiscal Times, MSN.com, Washington Post Magazine and Parade.
53 Comments
Pingback posted April 5, 2010 @ 6:08 am
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Pingback posted April 5, 2010 @ 6:52 am
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Comment posted April 5, 2010 @ 11:01 am
I took out on of these loans once back when I was poor and more naive about how banks worked. If you can't afford to pay for whatever goods or services you need this loan for, then chances are you will have trouble paying this loan back.
Comment posted April 5, 2010 @ 3:46 pm
It's sad that desperate people will get robbed by these bank. It's better to try to live within your means thank trust those banks.
Comment posted April 5, 2010 @ 9:49 pm
Back off!, sez the GOP. There you Librulz go again, tryin' ta squelch free enterprise and Capitalism (amen!)
All kidding aside, I need to see the Democratic brain-trust go after deregulation NOW. No time to dither on this issue
Pingback posted April 6, 2010 @ 5:05 am
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Pingback posted April 6, 2010 @ 6:28 am
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Comment posted April 6, 2010 @ 1:04 pm
As pointed out at the end of the article, Bank of America recently announced it would stop debit overdraft. Instead it would offer short-term advances at the ATM for a $35 fee. The Center for Responsible Lending praised this move in a New York Times article. http://www.nytimes.com/2010/03/10/your-money/cr…
Now they are criticizing US Bank and Wells Fargo for offering the same service for a $10 fee. Wells Fargo has been offering this service to satisfied customers since 1996 to help them avoid late fees and overdraft fees.
It seems that the CRL does not so much care what the service is, but who is offering it. They have been financed by shady mortgage lenders, credit unions, and other financial companies and seem to throw their weight around against specific players and in favor of others.
Pingback posted April 6, 2010 @ 3:46 pm
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Comment posted April 7, 2010 @ 1:18 am
does the federal reserve have a payday loan program for themselves?AFTER ALL;THEY GET PAID EVERY DAY.
Pingback posted April 7, 2010 @ 7:13 am
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Pingback posted April 7, 2010 @ 1:54 pm
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Comment posted April 7, 2010 @ 1:04 pm
Throw their weight around? They have no enforcement authority. That's the problem with the industry: banks do whatever the hell they want. Some NGO comes along and points out an obvious area of abuse and you think they are picking on ''certain players”? we're not talking about 12 yr olds playing hockey, we're talking about the biggest banks on the planet. Your attempt to elicit sympathy is rather bizarre.
Pingback posted April 7, 2010 @ 4:35 pm
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Pingback posted April 7, 2010 @ 5:16 pm
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Comment posted April 9, 2010 @ 2:56 am
Let's get down to brass tacks. I don't buy the theory that financial institutions lend to people who can pay it back. What I mean is that how can you guarantee that anybody will pay any loan back? You can make predictions and set parameters on who will be loaned to based on a set or criteria, but one cannot predict a sudden job loss or huge hospital bill. I know that some loan terms allow you to take a break from monthly payments for issues like these, but it doesn't exempt you from paying the loan off eventually. It is better to set money aside every month or pay period for something you want to buy than to “buy” it and then have to pay it back with interest attached. Plus, saving the money ahead of time to purchase it later with all money up front should give the consumer enough time to rethink whether the purchase is really wise or not, really what they want or not. or even to think about how it might be better to keep building a savings or purchasing something else of more value. As exceptions, I include home mortgages, education expenses, but a home must be one that provides the basic needs required by the household and the education must be something that could be subsidized by a student working while going to school to avoid unnecessary excess of education debt. Self-discipline is ultimately the only tool that will eradicate debt. The self-discipline to say, “I can afford that, but I don't need it.” or “I can't afford that, and I don't need it.” or “I can afford that, but I don't really want it.” along with “What more can I do to earn an honest income that doesn't unnecessarily take away from important family time?” I could go on, but suffice it to say that we are to work, to earn what we get. No amount of feigned appreciation can replace the true satisfaction of knowing I worked for something and truly appreciate what I've earned. Furthermore, that sort of appreciation turns into gratitude for the opportunities, the talents, and God's living breath to be able to do the work.
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Comment posted May 19, 2010 @ 5:51 pm
Payday loans are a great way to get out of a tight situation.And they are much better than bank loans.
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Comment posted July 12, 2010 @ 1:12 pm
while i do think they provide a service and are legally allowed to do so i totally agree that these should be a last resort and ideally avoided throughout your life.
http://www.paydaybank.ca/
Comment posted July 30, 2010 @ 1:19 am
“I can afford that, but I don't need it.” or “I can't afford that, and I don't need it.” or “I can afford that, but I don't really want it.” along with “What more can I do to earn an honest income that doesn't unnecessarily take away from important family time?
Comment posted August 13, 2010 @ 8:50 am
It is like that these bank are legal and they are allowed to provide services.Pay day loans are providing their services to the customers well.
Comment posted August 20, 2010 @ 3:02 pm
“your information about pay day loan is quite sufficient..im really impressed with this type of loan strategies..online cash advance loan is the best way to get money..and if you are getting it so fast this is also very good..
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Comment posted May 23, 2011 @ 10:51 am
WASHINGTON — Increasingly, mainstream banks are offering products similar to payday loans — short-term, high-interest loans secured by a pending paycheck — according to a consumer group that called on the Office of the Comptroller of . .
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