The payday loan industry has often been criticized by many people. Legislation and regulations have been passed at the federal, state and municipality levels to impose restrictions and control their operations. But did you know that many regional and even national banks too are also in the business of offering payday loans? They often disguise them under an appealing name, but in effect, they are nothing different than the payday loans offered by the many storefront and online operators.
Yes, the short-term lending solutions of banks to meet a financial shortfall are nothing different than payday loans.
At least 6 banks were involved with payday lending. These loans were offered to their checking account customers. For instance, this is what the website of Wells Fargo says, “If you’re facing loan payments, medical expenses, or repair costs you just can’t afford … Apply for a loan”. Incidentally, this is like the same language payday lenders use.
Charges of Banks Much Like the Payday Loan Industry
Banks have also been imposing fees, which are much like the payday lending industry. The fees range between $7.50 and $10 for each $100 borrowed. The disclosed cost came to 120 percent annual interest, which comes to 120 percent APR. The maximum amount offered was $500, which is less than payday lending, because many of them will sometimes offer up to $1500, based on the need of a customer.
Repayment is due on the payday of the borrower. Also, a study carried out by Borné and Smith has found that the average payday loan term for the banks has been around 12 days. A white paper published by the CFPB agreed with this finding. The banks even acknowledged offering these short-term loan products.
The banks deposit money directly into the checking account of their customers in the same bank. Consumers can withdraw online, through a toll free call, or with an ATM. These banks will often withdraw money directly from the account, if the consumer fails to pay back on time, even if the account goes into overdraft status. If this happens, then the bank will also charge an overdraft fee, with the exception of Fifth Third and Wells Fargo, who do not charge the overdraft fee for insufficient funds. They issue a warning to the customer saying that there could be penalty fees.
Inadequate Safeguards
Faced with criticism, the banks said they have “safeguards” in place for their payday loan products to make sure that the borrowers are able to pay back on time and don’t get into a debt trap. For instance, the bank won’t offer a second loan to the same customer till the time the original is not repaid. The fact is that, even the payday lenders follow the same principle, so there is in effect no difference here.
The CFPB recently found that in 65 percent of cases, the banks charged overdraft fees to their payday loan customers for insufficient funds. Payday lenders cannot charge an overdraft fee like what the banks do, so naturally there is no additional fee that has to be paid by the debtor. In this, a payday loan becomes cheaper than a similar bank product.
A Minneapolis-based Bank introduced payday lending in 2006. Loans were offered to those who had a checking account with the bank for at least 6 months or 12 months depending on some criteria’s. Directly deposited into the account, up to a maximum of $500, the money could be withdrawn online, at any of the bank’s branches, through a toll free number, or by using an ATM.
Maximum term of the loan was 35 days, and the minimum term was a single day.
They charged $10 for each $100 borrowed. The loan fee comes to 120% APR. The bank allowed repeat loans as well. In fact, the borrowers were allowed to take an advance in 9 consecutive statement cycles. The amount due was deducted automatically from the checking account with the bank. Payment could also be made online or by cash by walking up to any branch of the bank.
For a first time overdraft, per item fee was $19, which went up to $35 for overdrafts between 2 and 4 times. It was $37.50 if the account goes into overdraft 5 times or more. The bank charges $8 a day at the start of the fourth calendar day.
With assets that go into trillions of dollars, another bank used to be the largest bank that offered payday loans. Customers who got a minimum of $100 or more deposited from an employee or another agency into their checking account every 35 days was eligible. The bank used to offer the loan to their customers in all states. People could get the loan online, by calling the toll free number of through their ATM cards.
The money was deposited into the account immediately following the application. Applications were approved even if the account had an overdrawn status at the time of the application. However, the application was rejected if the account had negative balance for 7 days or more.
They too used to offer these loans up to $500. The maximum loan term was 35 days, and the minimum was for just a day or two. The cost of these loans was $10 for each $100, which came to 120% APR for one statement cycle.
They used to charge a late fee of $35 for defaults, and also the costs for collecting the payment and the attorney fees of the bank. No grace period was issued. Payment was deducted automatically from the checking account even if it did not have adequate funds and went into negative balance. Borrowers could also transfer from account themselves.
Called “Early Access”, customers could ask for the loan if they had an account for a minimum of 6 months, and had a deposit of $100 at least in two consecutive statement cycles. Checking accounts of students, those of minors, and non-individual accounts were not eligible. The bank offered this loan to their customers in many states, not all. Funds were transferred as soon as the request was successfully submitted. Access too was immediate. Customers could withdraw the money by using their ATM card, online, and directly at the bank.
The maximum loan size was $500, while the minimum amount was just $1. Fifth Third used to charge $1 for each $10 borrowed. The APR came to 120%.
Payment is taken out directly from the account on the due date, even if the checking account goes into negative balance. Customers were also allowed to pay themselves at a branch or online. Fifth Third used to charge an overdraft fee and also a fee for maintaining insufficient funds. The overdraft fees were $25 for a first incident in the year. For 2-4 overdrafts, it was $33 each, and $37 for 5 or more times in a year.
Of course, many of these banks have since then stopped offering their payday loan products, but they continue to offer others that charge steep fees and interests. Often, the cost for a consumer is very steep, indeed. But still, the payday loan industry has to face significant criticism and sanctions from many critics across the country. Most of them remain silent about the history of the banking sector, and what many of them are doing to this day.
It is no surprise that a large section of the population in the United States and in other countries too depend on payday lenders whenever they need cash urgently in the middle of the month. A payday loan remains their only hope because the conventional banking sector and other lenders are unable to meet their requirements.
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