“Step aside, Tony Soprano: Big banks will now lend money at 300 percent interestwithout threatening to break a leg.
Then again, the payday loans some big banks are offering can have other ill effects, such as financial ruin, according to a new study by the Center for Responsible Lending. Even as public anxiety grows about the dangers of payday lending, with 15 states recently banning the practice, many big banks are offering the service to their customers.
“Despite federal banking regulators’ recognition of the abuses of payday lending and aggressive action blocking previous bank partnerships with payday lenders, a few large banks have begun offering payday loans directly through checking accounts,” the study says. Large banks offering the service include Wells Fargo, U.S. Bank, Regions Bank and Fifth Third Bank.
The average annual percentage rate on a bank payday loan is 225 to 300 percent, the study says. Banks that offer payday loans extract payments automatically from the borrowers’ checking accounts on the next pay cycle. In some cases, that withdrawal cleans out a borrower’s checking account, leading to bounced checks. According to the study, users of paycheck advances are twice as likely to overdraw their bank accounts, leading to even more fees for the banks. And that’s just the start of the potential problems.
“Research has shown that payday lending often leads to negative financial outcomes for borrowers,” the study says. “These include difficulty paying other bills, difficulty staying in their home or apartment, trouble obtaining health care, increased risk of credit card default, loss of checking accounts, and bankruptcy.”
The elderly, already financially vulnerable and short on retirement savings, are making increasing use of these loans. According to the study, more than a quarter of bank payday loan borrowers are on Social Security.
Wells Fargo spokeswoman Richele Messick said the bank has been offering a payday loan service it calls “Direct Deposit Advance” since 1994. Available only to Wells Fargo customers, this loan has a set fee of $7.50 per $100, regardless of the length of the loan, which Messick said compares to the payday loan industry standard of about $17 per $100.
“It is an expensive form of credit, and we’re very clear with our customers that it is an expensive form of credit and not to be used as a long-term solution,” Messick said. “We have policies in place to make sure customers don’t use the service in the long term.”
Wells Fargo will not clean out a borrower’s account when taking money to pay itself back for payday loans, Messick said. The bank makes sure the customer gets to keep at least $100 from each paycheck, and if customers use the service for six months in a row, Wells Fargo will cut them off from more paycheck advances for a bit — what the CRL study calls a “cooling-off” period….”
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