Big Banks Now Offering Short Term Loans
Several large banks have begun to offer loans similar to those offered by payday lenders. Payday loans are relatively small advances that are paid when the borrower’s next paycheck is received. These loans are often accompanied by inflated fees. Consumer advocates criticized the loans, saying, compared to other credit products such as credit cards, they are extremely expensive. They state that the exorbitant fees can often drive borrowers into deeper debt by creating a borrowing cycle they can’t escape. The banks claim the loans are intended to be used as short-term, emergency cash, not a long-term way of managing money.
Previous concern has been expressed about loans offered by storefront payday lenders, some of whom charge fees that translate into annual interest rates over 400 percent. Recently, however, banks such as Wells Fargo, U.S. Bank and Regions have also begun to offer these types of loans to customers that have funds direct deposited into their checking accounts. As new regulations demanding stricter enrollment criteria for overdraft programs and limiting fees on debit-card swipes have been introduced, they and others have begun to search for ways to replace lost revenue.
U.S. Bank of Minneapolis offers a loan of up to $500 for as long as 35 days through Checking Account Advance. The fee is $2.00 per $20.00 borrowed. Wells Fargo also provides loans up to $500 and charges $7.50 for every$100.00 borrowed. Customers may access up to six consecutive loans. However, if after those six loans, the borrower is unable to bring their account into the black, no further cash advances are allowed until the debt is paid in full. Wells Fargo doesn’t offer short term loans in 14 states, some of which have banned payday lending. Regions bank limits loans to customers who have had an account with the bank for at least a year. It also has a “cooling off” period after six consecutive loans if the customer maxes out their credit.
Further scrutiny of the loans came about when the North Carolina Attorney General requested Regions Bank to provide evidence that the loans did not violate the state’s interest caps. In addition, a lawsuit has been filed against Fifth Third Bank by customers who claim that Fifth Third’s payday-like product violates state interest- rate caps and the federal Truth in Lending Act. They also state that the high cost of the loan is completely unwarranted since the bank has the ability to withdraw from the customer’s direct deposit the risk of nonpayment is low.
More consumers are finding it difficult to get loans, credit cards and lines of credit. These short-term loans are replacing other forms of credit. The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have recommended specific guidelines that should be followed regarding the short-term loans. The OCC states that they encourage banks to respond to their customers’ short term credit needs but that they should be aware that these loan products may pose a number of safety and soundness, compliance, consumer protection and other risks.