1. Archive


Published Nov. 19, 2012

Banks often tout their financial literacy programs.

So it strikes me as odd that some are offering loans that are 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 product is called "Direct Deposit Advance," and Regions Bank's is called "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 banking regulators to examine these products.

Americans for Financial Reform and other groups said banks' "deposit advance" loans are structured just like loans from payday loan stores - carrying a high cost and a short-term balloon repayment.

Research has shown that these loans trap borrowers in a cycle of expensive long-term debt, the group said, causing serious financial harm, including increased risk of bankruptcy, late payments of credit card and other bills, delayed medical care and loss of banking privileges because of overdrafts.

The letter caught the attention of the Federal Deposit Insurance Corp., which examines banks for compliance with consumer protection laws. Its Division of Depositor and Consumer Protection was asked to "make it a priority to investigate reports of banks engaging in payday lending and recommend further steps by the FDIC."

The Consumer Financial Protection Bureau is also looking into these loans.

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," Well Fargo's Messick said, citing federal lending regulations.

But Greg McBride, senior financial analyst, said "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 savings to avoid short-term loan.

"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.