When you imagine what a payday lender looks like, you probably picture a lot of neon lights, closed storefronts nearby, and some sad-sack shuffling by with a shopping cart full of empty aluminum cans. It’s hard to decouple payday advance lending from images of urban poverty, considering that this is the core audience for such non-traditional financial products, and these non-traditional financial products arguably perpetuate the poverty of the surrounding area. It might surprise you to know that clean-cut, well-behaved banks like Wells Fargo and U.S. Bank also offer payday advance loans for exorbitant rates. It caught the FDIC off-guard, and they’ll be investigating the practice following lobbying efforts spearheaded by Americans for Financial Reform, reports The Minnesota Star-Tribune.
Banks like Wells Fargo. U.S. Bank, Fifth-Third and Regions were all singled out by Americans for Financial Reform, in its letter, for their short-term, unsecured loans, which are structured similarly to the loans given out by seedy storefront operations. AFR argues that payday lending, while pitched as an emergency loan for people in a tough spot financially, actually act as a “debt trap,” and that banks ought to be more responsible with their customers.
Wells Fargo, for instance, offers something called Direct Deposit Advance for customers who use direct deposit on their checking accounts. Should a customer find herself in a bind, she can borrow up to 50 percent of her average monthly deposits, or $500 — whichever is less. Wells Fargo, for its troubles, will charge $1.50 for every $20 borrowed. Should a customer wish to borrow $200 for 30 days — the repayment period for this type of loan — she will pay $15. Annualized, this is a 90 percent APR — very, very unattractive stuff, were it annualized. U.S. Bank’s product, Checking Account Advance, works similarly, but charges $2 per $20 borrowed — an effective APR of 120 percent. Fifth Third’s product, Early Access, is priced the same as U.S. Bank’s but offers up to $750, compared to U.S. Bank’s $500 limit.
The banks all require that customers use direct deposit and do not lend more than half of average monthly deposits. Debts are paid automatically out of future deposits, typically within a month. By contrast, Cashback Payday Advance, a storefront lender, charges higher fees than any bank ($15 for $100, and it takes this money off the top of the loan, i.e., a $100 loan will only yield $85 cash) and has shorter repayment periods, leading to substantially higher effective APR.
The AFR, in a recent letter to the CFPB, explained how these loans have a tendency to keep users in debt. To wit:
Although payday loans are marketed as a way for borrowers to take on short-term debt to cover emergencies between paychecks, the reality is in fact very different. The product’s structure—lack of underwriting, high fees, short-term due date, single balloon payment, and having access to a borrower’s checking account as collateral—results in most borrowers having no choice but to take out more loans to pay off the initial loan.
In fact, they write, more than 75 percent of the volume of payday loans is actually due to something they call “churn” — “borrowers having to take out additional loans to pay off the original debt.” The industry claims that its volume, which is in the tens of billions annually, is evidence of the need for its product, but the AFR argues that the product’s, by its very nature, breeds dependence which manifests as demand. Furthermore, they state that “bank payday lending…cause[s] the same hards as [its] storefront counterparts” — this is the logic that has led to the FDIC investigation.
Not to sound overly sympathetic to the banks, because we are most certainly not, but the banks do have better terms than storefront lenders. They also state outright that these loans are not good ideas. Here is Fifth Third’s big-font caveat on its terms and conditions for Easy Access: “Please Note: This is an expensive form of credit….[if] you decide to borrow, borrow only as much as you can afford to pay back with your next direct deposit…[c]ontact a Fifth Third Banking Center for other credit options that are less expensive an may be more appropriate for your credit needs.”
That is sobering information when compared to storefront payday lenders’ marketing materials: stock photography of happy people fanning around wads of cash, cars, watches, whatever.
Furthermore, some banks offer backstops to a debt trap. Wells Fargo begins reducing the line of credit by $100 every month after a customer takes out credit for six consecutive months. At Fifth Third, customers who have maxed out their advance credit for six consecutive months are ineligible for 30 days.
In fact, as many brick-and-mortar banks get into alternative financial products, the fees seem to get less exorbitant. Prepaid cards, for example, were dominated by celebrity-sponsored rip-offs just a few years back; now, many banks offer affordable versions of the same, effectively pushing out the RushCards of the world.
Naturally, payday lending is an ugly business: it’s an instant loan that’s secured by your most liquid asset, your checking account. At least when banks do it, they do so in a straightforward fashion. That will ultimately be up to the FDIC to decide, however.