Banks Come Under Fire For Filling In The Payday Loan Gap
A payday loan is a costly form of credit operating on the fringes of the economy. That's why the target of a new crackdown by federal regulators may surprise you: Instead of a forlorn-looking storefront with a garish neon sign, it's your familiar neighborhood bank.
A small but growing number of banks, including some major players, have been offering the equivalent of payday loans, calling them "deposit advances."
That is, at least, until bank regulators stepped in Nov. 21 and put new restrictions on the loans.
"Many of these loans are taken on a nearly continuous basis," Consumer Financial Protection Bureau representative David Silberman told a Senate panel in July.
He and other regulators worry that deposit advances can lead consumers into a cycle of debt.
"For far too many consumers, payday and deposit advance loans are traps," Silberman said. "Returning every two weeks to re-borrow the same dollar amounts at a high cost becomes a drag on the financial well-being of consumers already facing income shortfalls."
Terms vary by bank, but basically, here's how it works: You borrow the money, and in return you give the bank the right to go into your account and pay itself back, plus a fee, as soon as your next direct deposit comes in.
Some states have fought and banned storefront versions of payday lenders, only to find banks filling the gap.
In Arkansas, nearly 300 payday lenders were operating in 2008, according to Hank Klein, a retired credit union president who became an activist against payday loans.
But, Klein says, a court ruling allowed the state attorney general to drive them out.
"They've been run out of the state by the attorney general," Klein says. "Well, now the banks come in and [they're] doing the same thing. They operate under federal laws, so the attorney general can't do anything."
Fees Quickly Add Up
About five years ago, Annette Smith, a grandmother from California, needed money to fix her truck, so she went to her local Wells Fargo for a loan.
"I asked one of the loan officers if I could make a small loan," she says. "And he said, 'We don't loan money any less than $5,000. But we do have a service that's called a direct deposit advance. And you can go home and access that on your computer and you can borrow up to $500.' "
So Smith did, and $500 appeared in her account.
Smith qualified for the loan not because she had good credit — she didn't — but because she had recurring direct deposits. In her case, those deposits were Social Security benefits of about $1,100 a month.
Related Documents
From The Bankers:
Wells Fargo Bank Letter To Federal Regulators
Letter To Bank Regulators From Industry Groups
From The Regulators:
Consumer Financial Protection Bureau Report
Office Of The Comptroller Of The Currency Final Guidance
From Consumer Advocates:
Consumer Coalition Comments On Proposed Federal Regulations
Consumer Federation Of America Comments To Regulators