Some Big Banks Offer Payday-Like Loans - NYTimes.com

Some large banks are offering short-term loans akin to those offered by payday lenders, says a report from the Center for Responsible Lending, a nonprofit group.

Payday loans are short-term advances of relatively small amounts, often with hefty fees, that are repaid when the borrower?s paycheck arrives. Consumer advocates say the loans are extremely expensive compared with other forms of credit, like credit cards, and can often lead borrowers into a debt spiral they can?t escape. The new Consumer Financial Protection Bureau recently convened a public forum to gather information about payday lending by both banks and nonbanks.

Concern about payday loans has previously focused on storefront payday lenders where, according to the responsible lending center, fees can translate into annual interest rates of more than 400 percent. But the center?s report looks at four big banks (Wells Fargo, U.S. Bank, Fifth Third and Regions) that also offer advances to customers who have their paycheck, or their benefits check, directly deposited into their checking accounts. More banks appear to be interested in offering the service, according to the report from the center, based in Durham, N.C.

The advances can be as large as $500, for which the bank charges a fee ? typically, $10 for each $100 borrowed. When the next scheduled direct deposit arrives, the bank deducts the advance, plus the associated fee. Usually, the advance must be repaid within 30 to 35 days. (In some cases, customers can pay back over a longer period of time).

The banks say the funds are meant to be used as a short-term solution to an emergency cash crunch, rather than a long-term way of managing your money. So what?s the problem?

Consumer advocates say the loans are costly and encourage users to overspend. The average annual percentage rate for the bank advances ? assuming a fee of $10 per $100, for a typical loan outstanding for 10 days ? is 365 percent, the center?s report says.

The annual rate drops to 120 percent for a loan term of one month, which is the maximum time such loans are typically left outstanding, the center?s analysis found. Even so, an annual rate of 120 percent ?is significantly more expensive than alternative credit products such as credit cards or consumer finance loans,? the report notes. By comparison, the report notes, in the second quarter of last year, the average credit card interest rate was 13 percent.

Two of the banks ? Fifth Third and Regions ? cite an annual percentage rate of 120 percent in explanations on their Web sites. Fifth Third uses the number, even though there is no interest rate associated with its advance product, its Web site says, ?so our customers can compare the cost of using this product? against other forms of credit.

Regions, meanwhile, notes in its disclosure that customers who opt to pay their advance back over time will pay the fee, plus 21 percent interest. But if the fee also is taken into account and presented on an annualized basis, the cost of a cash advance ?would be significantly greater than the APR of the periodic-rate interest alone and may be 120 percent or more.?

?We are mindful of our responsibility to partner with our customers and we seek to establish an environment that encourages responsible lending and repayment,? John Owen, senior executive vice president of consumer services at Regions, said in a statement after testimony at the financial protection bureau?s hearing in Alabama last month. The bank started offering the loans, called Ready Advance, last May. (Repayment information from the Regions product is reported to credit bureaus, the bank says, and so may help consumers rebuild credit.)

A Wells Fargo spokeswoman says the bank doesn?t provide an APR figure in its disclosures for the advances, which it has offered since 1994, because the associated fee doesn?t change over time. If someone borrowed $300, the fee would be $22.50, regardless of when they pay it back. ?It?s a very transparent fee,? she said. ?The customer knows when they?re getting the service what their charge is going to be.?

Still, Wells Fargo, which charges $7.50 per $100 borrowed (which translates to 270 percent APR for a 10-day loan term, the center says), warns customers on its Web site that a direct-deposit advance can be costly. ?It is important to note the service is an expensive line of credit intended to assist with short-term borrowing needs and is not recommended as a solution for your long-term financial needs,? the site says.

Wells Fargo provides a comparison of the cost of the loan with other forms of credit, she said, so customers can evaluate their options.

A spokeswoman for U.S. Bank, Teri Charest, said in an e-mail that ?an extremely small percentage? of its customers use the checking account advance feature, which is intended for emergency needs, like an unexpected medical expense or car repair. The bank limits how long customers can use the advance, to help them avoid becoming overextended, she said. Projecting an APR for advances ?is not appropriate,? she said, because the fee must be repaid with the next direct deposit. But, she said, each time customers use the advance, they receive a warning that it is ?high cost credit? and meant for short-term needs.

Do you think the fees for direct-deposit advances are reasonable?

Source: http://bucks.blogs.nytimes.com/2012/02/08/some-big-banks-offer-payday-like-loans/

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