Seeking new income after federal rules limited fees from overdrafts and debit cards, Wells Fargo, U.S. Bancorp, and other big banks are pitching short-term, high-cost loans that resemble the payday loans more commonly offered by strip-mall storefront operations. At least five banks are offering the loans, typically through a customer’s online account, though the banks don’t use the stigmatized “payday” label. Regions Financial, a Birmingham (Ala.)-based bank, has introduced a product called Ready Advance, while Wells Fargo markets Direct Deposit Advance. Although a rose by any other name …
Banks say they offer a lower-cost product than traditional payday loans and, unlike nonbank lenders, make sure customers can’t roll over their borrowing indefinitely. Wells Fargo limits its loans to $500, charges $7.50 per $100 borrowed, and cuts off customers who have not paid up after six consecutive loans. U.S. Bank, the banking brand of Minneapolis-based U.S. Bancorp, offers 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.
The Federal Deposit Insurance Corp. and the newly created Consumer Financial Protection Bureau are scrutinizing these payday loan-like products. And one state attorney general, Roy Cooper of North Carolina, is looking at whether the products deceive consumers into taking out usurious, and potentially illegal, loans. “We want to come at this from all angles to prevent these kinds of loans in North Carolina,” says Cooper. In September, Cooper criticized Regions for marketing the product in his state, demanding details from the lender so investigators could determine if it’s violating the state’s anti-payday-lending law. Spokesmen for Wells Fargo, U.S. Bancorp, and Regions declined to comment on regulatory matters. In an Oct. 4 letter to North Carolina officials, Jeffrey Lee, Regions’ executive vice president, said the loans “create a credit record that will enable [borrowers] to graduate to more mainstream credit products, whether with us or with another reputable institution.” Customer feedback, he wrote, has been “overwhelmingly positive.”
In August two customers sued Fifth Third Bank in federal court, arguing that the loans violate both federal law and state interest rate caps. The cost of the loans was “particularly unwarranted” because the bank’s ability to withdraw from the customer’s next direct deposit means the risk of nonpayment is low, the lawsuit stated. Fifth Third spokeswoman Debra DeCourcy declined to comment because the litigation is pending.
Banks are looking for ways to replace revenue lost to tougher rules against overdraft fees, a 2010 Federal Reserve rule limiting debit-card swipe fees, and other regulations. By offering short-term loans, “banks can serve a different kind of consumer that they typically wouldn’t,” said Jeffery Yabuki, chief executive officer of Fiserv, in a July 30 conference call with analysts. Fiserv, based in Brookfield, Wis., sells software packages that help banks market and manage the products.
Some banks are staying away from short-term lending. Frank Rauscher, a Dallas-based consultant who advises devout Catholics on companies they should exclude from their portfolio, says this year he won commitments from Citigroup and JPMorgan Chase to avoid the loans. At its annual meeting in Dallas in April, Citigroup’s then-CEO, Vikram Pandit, said in response to a question from Rauscher that the bank “would not” offer the loans, Rauscher says. Gordon Smith, co-CEO for consumer and community banking for Chase, told Rauscher in a phone conversation in August that his bank would not offer the loans. JPMorgan spokesman Patrick Linehan confirmed Rauscher’s account. Citigroup did not respond to requests for comment.
With the traditional storefront-variety loan, borrowers provide a check postdated to their next payday in exchange for cash on the spot. Online versions require clients to provide bank account data for direct debiting. Consumer groups charge that payday loans obscure costs and ensnare borrowers in a cycle of debt. The new Consumer Financial Protection Bureau says payday loans carry annual 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.
The Durham (N.C.)-based Center for Responsible Lending says bank payday customers pay an average annual interest rate of 365 percent, get 16 loans annually, and spend more than half the year in debt. The borrower gets stuck “because they cannot afford to repay the loan in full, plus the fee, and meet ongoing expenses,” the group wrote in a report.
That’s what happened to Karen Buschke of Birmingham. This past spring, Buschke saw an ad for Ready Advance loans on the Regions website and decided to borrow $150. A few days later, the bank deducted the repayment from the weekly paycheck she gets from the auto repair shop where she works. With her take-home pay reduced, she found she needed to borrow money every week to meet her obligations, incurring fees. Regions charges $1 per $10 borrowed. “It was a vicious circle for me,” Buschke says.
When she complained to the bank that she wasn’t getting enough time to repay her loans, Regions converted her balance into an installment loan, which she paid off in early October. The Regions loan includes a “cooling-off period” if borrowers max out their credit line for six consecutive months, says Evelyn Mitchell, a spokeswoman for the bank. Buschke is now in the cooling-off period, which means she cannot take out more loans from Regions.