Traditional banks also offer payday loans – The Mercury News


Tired of being buzzed around a storefront covered in bulletproof glass, Carl Martineau found a more dignified place to get a cash advance on his Social Security checks: a branch of Wells Fargo Bank.

For California residents who simply can’t make ends meet, the bank’s tidy decor looks so much more appealing than the gritty payday loan stores that offer triple-digit interest rates in poorer neighborhoods across the country. the state. However, more and more traditional financial institutions are selling similar loans.

In California, payday lenders charge an annual interest rate of 460% for a two-week cash advance on a borrower’s paycheck or benefits. Conditions at major commercial banks are only slightly better – an average of 365% for a 10-day cash advance.

“People who know to avoid payday lenders think that if a bank offers it, it has to be safe,” said Lauren Saunders, chief counsel for the National Consumer Law Center. Yet “a bank payday loan presents the same problems as a traditional payday loan. You are caught in the same debt trap.

Bank officials say low-income customers are sometimes in desperate need of cash advances. But they stress that they don’t advise renewing the loan because of the admittedly high cost of the product – which banks say they don’t strongly promote.

Still, Martineau, who lives with his Honda Civic and has relied on as many as five payday loans at a time from mainstream stores, sees the bank as another salvation. He made his first Wells Fargo lead start in December.

“Payroll locations are very stigmatized. We really feel like we’re at the bottom of the barrel, ”said Martineau, 59. “Going to the bank is much more dignified. You don’t feel so ostracized.

Not subject to prohibitions

Last month, the Bay Area News Group reported on the proliferation of payday lenders in California and the powerful lobbying industry that fuels their success. Although 17 states have pushed lenders out of business, family-owned outfits and national chains have attracted hundreds of thousands of new California customers, while donating to politicians now pushing an industry-backed bill to expand. the loans.

Traditional banks avoid the title of “payday loan”, perhaps because of the stigma. They call their transactions “advances” on direct deposits and argue that they are not subject to bans in various states because national banking standards take precedence over state laws.

Banks also lend to US troops, using a loophole in a 2006 federal law that bans military payday loans at rates above 36%. Congress passed the law after a Pentagon report described payday loans as “predatory” and a national security threat to devastating military assets.

There is little publicly available data on the reach of bank payday loans, unlike non-bank point-of-sale loans, which reached $ 3.1 billion last year in California. However, federal regulators are starting to pay more attention to it.

In 2011, Regions Bank became the last major bank to offer payday loans in recent years, joining Wells Fargo, US Bank, Guaranty Bank and Fifth Third Bank: all of which offer payday loans in states that prohibit three-way loans. figures in stores.

Georgia has made payday lending a racketeering-fee crime for non-bank payday lenders, but Guaranty Bank offers a similar loan in Georgia. In Ohio, where voters have passed an interest rate cap for payday loans of 28%, Fifth Third Bank’s “Early Access Loan” has an annual percentage rate of 520% ​​for loans taken out. one week before payday.

Borrow more easily

Banks have also made payday advances much more convenient. They can be arranged online or over the phone 24 hours a day, 7 days a week.

Wells Fargo spokesperson Ruben Pulido described his bank’s Direct Deposit Advance program as “designed to help people facing an emergency, something short-term or unexpected, like a car “. High-cost loans are “not meant to solve long-term financial needs,” he added.

Wells Fargo customers who have a checking account and recurring direct deposit can borrow up to half of their monthly income, or a maximum of $ 500. At most banks, fees average $ 10 for every $ 100 borrowed. Wells Fargo charges $ 7.50 for every $ 100. Non-bank lenders charge $ 15 per $ 100, but under California law they can only lend $ 300 at a time.

Officials at the bank were unwilling to reveal how many loan clients it has, but said clients who use payday advances appear satisfied. “People say they have a sense of security that they will pay the full amount on their next deposit,” Pulido said, “and they don’t have to charge it on their credit card.”

But there are signs of hidden distress. Depending on the banking conditions, loan amounts are automatically deducted from the customer’s next direct deposit, even if this results in an overdraft fee.

“They get the first cut in your income – whether it’s wages or public benefits – before you pay for food, rent or medical bills,” said attorney Saunders.

Studies of borrowing patterns show that the vast majority of customers are so broke that once they take out a first loan, it almost always leads to more loans. This piles fees on top of fees until a significant portion of borrowers’ already low income goes to the lender, not household bills.

Rising interest

In an analysis of bank payday loan customers, the Center for Responsible Lending reported in July that loans last an average of 10 days.

Because the fee is a fixed percentage of the loan amount, the shorter the loan term, the higher the interest rate. While a one-month loan carries 120 percent interest, for example, a 10-day loan has 365 percent interest.

According to the center’s report, payday borrowers took on an average of 16 loans per year; some have borrowed more than 35 times. Social security recipients were more than twice as likely to use the loans as other bank customers.

Consumer advocates warn that banks trick customers by downplaying annual percentage rates – the benchmark that calculates fees and interest measured over a year. The APR is a central consumer protection of the Truth in Lending Act of 1968, as it allows borrowers to weigh one loan against another.

When approving payday advances, banks don’t measure the borrower’s ability to repay the loan, other than determining that the customer has direct deposit of a check.

Banks recognize the dangers of repeat borrowing.

US bank spokeswoman Teri Charest said her bank only provides account advances to “a very small percentage” of customers. After three months, they are contacted “to see if there is a better alternative for their credit needs,” she said. And after nine consecutive months, the bank imposes a “cooling off period” of three months.

Slice of the pie

Despite the warnings, more and more banks are being pushed by industry consultants to join the market to make up for lost revenue due to new federal regulations that limit overdraft fees. Representatives from Fiserve, an industry software vendor, present the market for lending small dollars to banks as “a very attractive income opportunity” – and a way to “make real money”.

Jean Ann Fox, director of financial services for the Consumer Federation of America, noted the trend: “The banks have said, ‘Look at all this money that payday lenders are making from our customers; why should we share with them? Let’s go ourselves. “

The United States Office of the Comptroller of the Currency, which oversees 1,500 federally chartered commercial banks, is drafting guidelines that will prompt bank examiners to determine whether payday advances lead to consumer abuse.

Fox said federal overseers have so far failed to take meaningful action. This, she added, fuels the industry as a whole.

“To the extent that banks get away with scot-less has become a lobbying point” for payday lending stores, she said. “This is helping to undermine the state’s efforts to control and curb the market for low-cost and high-cost loans.”

Contact Karen de Sá at 408-920-5781.



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