Banks Slammed for Closing the Payday Loan Gap: NPR

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Federal regulators are setting new rules for banks that offer deposit advances.

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Federal regulators are setting new rules for banks that offer deposit advances.

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Payday loan is an expensive form of credit operating on the fringes of the economy. That’s why the target of further crackdown by federal regulators may surprise you: Instead of a sad-looking storefront with a garish neon sign, it’s your familiar neighborhood bank.

A small but growing number of banks, including some major players, offer the equivalent of payday loans, calling them “deposit advances”.

That is, at least, until banking regulators step in on Nov. 21 and put new restrictions on lending.

“Many of these loans are taken out on an almost continuous basis,” Bureau of Consumer Financial Protection representative David Silberman told a Senate panel in July.

He and other regulators fear that deposit advances could drag consumers into a cycle of debt.

“For far too many consumers, payday loans and deposit advances are pitfalls,” said Silberman. “Coming back 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 deficits.”

The terms vary from bank to bank, but basically this is how it works: you borrow money and in return you give the bank the right to go into your account and get paid back, plus fees, as soon as your next direct deposit arrives. .

Some states have fought back 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 has become an activist against payday loans.

But, Klein says, a court ruling allowed the state attorney general to kick them out.

“They were kicked out of the state by the attorney general,” Klein says. “Well, now the banks come in and [they’re] do the same thing. They operate under federal laws, so there is nothing the Attorney General can do. “

The costs add up quickly

About five years ago, Annette Smith, a Californian grandmother, needed money to fix her truck. So she went to Wells Fargo to get a loan.

“I asked one of the loan officers if I could make a small loan,” she says. “And he said,” We don’t lend less than $ 5,000. But we have a service called direct deposit advance. And you can go home and access it on your computer and you can borrow up to $ 500. “”

This is what Smith did and $ 500 appeared in his account.

Smith qualified for the loan not because she had good credit – she didn’t – but because she had recurring direct deposits. In his case, those deposits were Social Security benefits of about $ 1,100 per month.

From the bankers:

From regulators:

From consumer advocates:

For Smith, this turned out to be a very expensive arrangement. She ended up taking repeated advances – 63 of them over five years – and paying nearly $ 3,000 in fees.

She now knows that the fees were an annual interest rate of 180%.

“If I had known it was 180 percent interest, it probably would have caught my eye, instead of [a fee of] $ 50, ”she says.

One of the reasons Smith didn’t know his interest rate is because the law doesn’t require banks to calculate it. Plus, the annualized cost of money varies depending on how long it takes to pay it back.

Loan or line of credit?

And as long as banks talk about fees, not interest, they don’t need to disclose annual rates.

Banks don’t even qualify deposit advances as loans. Officially, these are indefinite credit lines.

Senator Joe Donnelly, D-Ind., And bank lobbyist Richard Hunt clashed over this point during this Senate hearing this summer.

Hunt represents four of the six banks that make deposit advances.

“Do you think it’s appropriate that some of the most respected bank names are doing over 200% off their customers? Donnelly asked him.

Hunt replied, “First of all, I don’t accept that it’s 200%, because it’s a line of credit – it’s not a loan. If we were charging 200% for a home loan, I’m with you. is not a loan, it is a line of credit. “

Donnelly wasn’t buying it. “You know that’s not what we’re talking about,” he said.

Hunt said banks offer deposit advances to help consumers when they are low on cash and their fee information is clear.

“If we don’t choose to help them, they have several choices,” he said. “They can turn to the traditional or online payday loan, which is expensive; the pawnshop, which is even more expensive; or like the the Wall Street newspaper recently pointed out, they will return to the Tony Sopranos, rest in peace, of the world. It is the most expensive. “

But when a bank lobbyist defends them by saying they’re better than organized crime, it’s no surprise regulators got worried.

The U.S. Comptroller of the Currency and the Federal Deposit Insurance Corp., both regulators of federal banks, say deposit advances pose a risk not only to consumers but also to the banks themselves – in part, to their reputation. .

The two agencies took action, immediately affecting four of the six banks known to offer deposit advances: Wells Fargo, Guaranty Bank, US Bank and Bank of Oklahoma.

These banks, if they continue to offer deposit advances, will only be allowed to lend money once a month and not several consecutive months. They will also need to assess whether their clients can repay loans and meet their basic expenses.

Two other banks, Fifth Third and Regions Bank, are regulated by the Federal Reserve, which has not issued similar restrictions.

The CFPB, which has broad jurisdiction over consumer financial transactions, said it would also take some action.

Smith, the Californian grandmother, has become a vocal critic of filing advances since her experience, even testifying before Congress. NPR has contacted Wells Fargo regarding their loan.

Bank spokeswoman Richele Messick declined to discuss details of Smith’s case. But she said Smith could have qualified for a payment plan, for free.

Nonetheless, in Smith’s eyes, his bank violated his trust.

“The bank is where you go, and you wouldn’t be taken advantage of, you would be helped. And because they called it a service, and they called it, you know, a fee, I made them. confidence.”

After Smith caught the attention of a local advocacy group, Wells Fargo agreed to forgive her for her latest lead – if she was willing to never take another. But she still hasn’t paid the $ 3,000 she paid to borrow money.

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