Banks facing lower revenue from debit-card and overdraft fees are ramping up marketing of small short-term loans, prompting regulators to question if they carry the same risks to borrowers as other forms of payday lending.
The high-cost loans offered by firms including Wells Fargo & Co. (WFC) and U.S. Bancorp (USB) are meant for people who can’t access other forms of bank credit, similar to the clients of storefront or online payday lenders.
Scrutiny of the loans increased on Sept. 21, when North Carolina Attorney General Roy Cooper asked Regions Financial Corp. (RF) to provide data showing its loans don’t violate the state’s interest-rate cap. That followed a decision in May by the Federal Deposit Insurance Corp. to investigate payday-like products offered by banks, joining an inquiry by the Consumer Financial Protection Bureau.
“They lend money at a high interest rate and get it paid back at the next paycheck,” Cooper said in an interview. “We want to come at this from all angles to prevent these kinds of loans in North Carolina.”
The matter also has found its way into the judicial system. In August, a private lawsuit was filed in U.S. District Court in Ohio, claiming that Fifth Third Bancorp (FITB) deceived customers about the true costs of its short-term loans.
Traditional storefront payday loans are secured by a check, post-dated to a borrower’s next payday. Online versions require clients to have payments directly debited from their bank account. Consumer groups have charged that the loans prey on low-income people by concealing costs and ensnaring them in an expensive debt cycle.
The consumer bureau has said traditional payday loans can carry annual interest rates as high as 521 percent. The cost of the loans is usually expressed by converting the fees into an annual percentage rate. For example, a two-week $100 loan carrying a $15 fee would have a 390 percent APR.
At least five banks are offering the loans, typically through a customer’s online account. The banks don’t use the term “payday.” The Regions loan is called Ready Advance while Wells Fargo markets Direct Deposit Advance. Banks say they offer lower interest rates than traditional payday loans and that, unlike nonbank lenders, they make sure customers can’t renew their borrowing indefinitely.
Customers at Regions have given “overwhelmingly positive feedback” to the short-term loans, Jeffrey Lee, the bank’s executive vice president, wrote in an Oct. 4 letter to North Carolina officials.
Lee said the loans “create a credit record that will enable them to graduate to more mainstream credit products, whether with us or with another reputable institution.”
Months in Debt
Bank products have similarities to typical payday loans, according to a study by the Durham, North Carolina-based Center for Responsible Lending. The group, which said it analyzed how 55 customers used the loans, concluded that they paid an average annual interest rate of 365 percent, took out an average of 16 loans annually and spent more than half the year in debt.
“These loans are structured just like loans from payday shops, where borrowers typically are stuck in multiple payday loans per year -- usually in quick succession with a new fee each time, because they cannot afford to repay the loan in full, plus the fee, and meet ongoing expenses,” the group wrote in the report.
The cost of the loans is “particularly unwarranted” because the bank’s ability to withdraw from the customer’s next direct deposit means the risk of nonpayment is low, according to the lawsuit against Fifth Third filed Aug. 3 by customers William Klopfenstein of Royal Oak, Michigan, and Adam McKinney of Lanesville, Indiana.
Fifth Third’s payday-like product violates state interest-rate caps and the federal Truth in Lending Act, the suit alleges. Fifth Third spokeswoman Debra Decourcy declined to comment on pending litigation.
Banks, which don’t separate out their earnings from short-term loans when reporting results, are seeking ways to replace revenue lost to regulations such as tougher enrollment criteria for overdraft programs and a 2010 Federal Reserve rule limiting debit-card swipe fees. They are paying increased attention to short-term loans, according to Fiserv Inc. (FISV), a Brookfield, Wisconsin-based firm that sells a software package to help banks market and manage the products.
“Banks can serve a different kind of consumer that they typically wouldn’t serve, in a far more cost-effective way,” Jeffery Yabuki, Fiserv’s chief executive, said in a July 30 conference call with analysts.
Fiserv said its Relationship Advance software suite is aimed at helping banks identify which customers might be receptive to short-term loans. The firm says in marketing materials that the product would cause at most a small drop in a bank’s revenue from checking-account overdraft fees. Overdraft fees accounted for $31.6 billion in 2011 revenue for U.S. banks, said Lake Bluff, Illinois-based Moebs Services, a research firm.
The flow of revenue from those fees may shrink as the consumer bureau investigates whether banks are marketing overdraft-protection programs in a misleading way.
Michael Calhoun, president of the Center for Responsible Lending, said he met this month with Brenda Potter, Fiserv’s vice president of public affairs, urging the company to abandon its payday product. Potter declined, she said in an interview.
Potter said the company sees “great potential” among all types of banks and credit unions. Fiserv doesn’t disclose the number of clients who use the software, she said.
The software appears as a button on online bank accounts. When clicked, it takes the user through an enrollment process. It is a “vanilla system,” in which the bank controls all the essential characteristics of the loan, such as maximum size, maturity and fees, Potter said.
Wells Fargo limits its Direct Deposit Advance loan to $500, and charges $7.50 per $100 borrowed. Customers may access as many as six consecutive loans. If borrowers fail to bring their account into the black after those six loans, no further cash advances are permitted until the debt is paid in full.
San Francisco-based Wells doesn’t offer the product in 14 states, many of which ban payday lending.
U.S. Bank, the banking brand of Minneapolis-based U.S. Bancorp, markets Checking Account Advance, a loan of up to $500 for as long as 35 days, according to its website. The fee is $2 per $20 borrowed. Tulsa, Oklahoma-based BOK Financial Corp. (BOKF), parent of the Bank of Oklahoma, offers a similar product called FastLoan.
The Regions loan is available to customers who have been with the bank at least a year. It includes a “cooling off period” if borrowers max out their credit line for six consecutive months, Evelyn Mitchell, a spokeswoman for the Birmingham, Alabama-based bank said.
The banks may be drawing the same kinds of customers who use traditional payday lenders. Regions has calculated that about 50 percent of its customers who use Ready Advance earn over $50,000 per year, and 24 percent earn over $75,000, according to Lee’s letter.
Advance America Cash Advance Centers, Inc., a chain of storefront payday lenders that was acquired by Grupo Elektra SAB (ELEKTRA*) this year, has a similar customer base with a median income of about $54,000 and 20 percent of customers making over $75,000, according to Jamie Fulmer, a senior vice president at the company. The median income has risen from the “low 40s” in the last few years, Fulmer said.
“So many of our customers chose our products and services instead of those offered by their banks. In many cases this is because a loan from Advance America may be less expensive, in addition to being simple, transparent and fully disclosed,” Fulmer said in an e-mail.
Karen Buschke of Birmingham said she saw an advertisement for Ready Advance loans on the Regions website and decided it was similar to short-term loans she’d previously gotten for emergency car repairs or to pay a medical bill.
“I looked at it and thought, ‘This is just like a payday loan,’ ” Buschke, 53, said in an interview.
She borrowed $150. The bank deducted the repayment from her weekly paycheck a few days later. That started a cycle in which she borrowed additional money to meet her other obligations.
Buschke complained to the bank that she hadn’t had enough time to repay the loan. Her balance then was converted into an installment loan, which was finally paid off early this month. The bank has since put her in the cooling-off period, she said.
Shay Farley, legal director for Alabama Appleseed, a Montgomery-based advocacy group, said she disagreed with consumer advocates who are “hammering” Regions over its marketing of the product.
Executives at the bank have met with her group twice, and have shown they’re serious about consumer protection by changing the product’s structure over time, she said.
“I think they are trying to do the right thing -- to find a product that meets the customers’ needs and makes a profit,” Farley said in an interview. “It may be an answer, even if it’s not the perfect answer.”
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