Banks' 'deposit-advanced' loans just another name for payday lending
The Seattle Times
By: Pamela Yip
November 24, 2012
Banks often tout their financial-literacy programs.
So it strikes me as odd that some are offering loans similar to what payday lenders offer. These products can land financially uneducated consumers in a heap of trouble.
Banks reject the payday-loan label and have given their products other names.
Wells Fargo's is called "Direct Deposit Advance," and Regions Bank's account is "Regions Ready Advance."
"It is based on an advance on a paycheck or a direct deposit that is coming into an account," said Richele Messick, Wells Fargo spokeswoman, "but we do see our service as different than what most people think of when they think of a payday-loan shop."
For starters, she said, "the service is only available to our customers, established customers who have a consumer-checking relationship and they have the recurring direct deposit. So someone walking in off the street is not going to be able to use this service."
Even so, it is what it is -- an expensive short-term loan.
Consumer groups have asked regulators to examine these products.
"We write to urge the federal regulators of our nation's banks to take immediate action to stop banks from making unaffordable, high-cost payday loans," said Americans for Financial Reform and other groups.
They said banks' "deposit-advance" loans are "structured just like loans from payday-loan stores -- carrying a high cost, combined with a short-term balloon repayment."
"Research has long shown that these loans trap borrowers in a cycle of expensive long-term debt, causing serious financial harm to borrowers, including increased likelihood of bankruptcy, paying credit-card debts and other bills late, delayed medical care and loss of basic banking privileges because of repeated overdrafts."
The letter caught the attention of the Federal Deposit Insurance Corp., which examines banks for compliance with consumer-protection laws.
The Consumer Financial Protection Bureau is also looking into these loans.
"We already have begun examining the banks and we will be paying close attention to deposit-advance products at the banks that offer them," said Richard Cordray, bureau director.
In their disclosure forms, the banks do make it clear that deposit-advance products shouldn't be used regularly.
"It is important to note this service is an expensive form of credit designed for short-term borrowing needs," said Wells Fargo. "Alternative forms of credit may be less expensive and more suitable to your long-term financial needs."
Wells Fargo charges an "advance fee" of $1.50 for every $20 borrowed, so a $100 advance would cost $7.50 in advance fees.
The product doesn't have an annual percentage rate because "the fee that we charge doesn't change over time," Messick said, citing federal lending regulations.
But Greg McBride, senior financial analyst at Bankrate.com, said that "depending on how you repay the advance, the annualized rate on payday advances can be 78 percent or more."
That assumes you repay the loan in 35 days, he said.
The banks have set limits on how often consumers can use deposit-advance products.
"If a customer uses this service for six consecutive statement cycles, we ask them to take a break because we don't want them to use this for a long period," Messick said.
Still, you can avoid all this by building up your savings so you won't have to seek a short-term loan for emergencies.
"Payday advances are a costly form of borrowing, as all short-term credit facilities are," McBride said. "As a consumer, your best line of defense against the inevitable unplanned expenses is an emergency savings account. Even a modest savings-account balance of a few hundred dollars can be enough to stave off the costs of getting caught temporarily short of funds."
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