Federal regulators scrutinize banks’ ‘advance direct deposit’ loans
Short-term loans from both banks, payday lenders drawing fire
By James Peter Rubin
Need cash in a hurry?
People who have run to the neighborhood cash advance outlet for quick money are finding more sources for short-term loans in unexpected places — local bank branches.
At least five regional and national banks now offer versions of advance direct deposit loans. Banks advance borrowers the money, with the loans repaid from scheduled future direct deposits — usually from paychecks or Social Security and other government benefits.
Consumer groups say the loans closely mimic the terms of controversial high-interest payday loans offered at nonbank, retail outlets in urban and rural areas across the country.
Advance deposit loans are billed as short-term, but snare consumers in long-term debt, says Kathleen Day, a spokeswoman for the Center for Responsible Lending, a North Carolina consumer advocacy and research organization. What do you think the chances are that a person who takes a loan that’s big interest and short term can pay back the loan and fee and still have enough for goods and services? Not high, Day says.
In February 2012, the group was one of 250 national and regional consumer, religious and community groups and individuals asking federal regulators to take immediate action to stop banks from making unaffordable, high-cost payday loans.
Rising demand from some banking customers for small-dollar, short-term loans has led U.S. Bank, Regions, Guaranty and Fifth Third banks to offer advance deposit loans ranging from $1 to $1,000. A fifth bank, Wells Fargo, has been offering short-term loans since 1994.
The new federal financial watchdog agency, the Consumer Financial Protection Bureau (CFPB), has launched closer scrutiny of both banks and payday lenders offering high-interest, small-dollar loans with an eye on whether these loans are fairly marketed to low-income consumers.
How the loans work
Here’s how advance deposit loans work:
Say you need $100 to pay your rent or cover some other expense, but don’t have the money in the bank. You’ve been receiving $500 monthly via electronic deposit. The bank agrees to a loan on the assumption that it will be able to automatically draw the full amount plus a fee from your next $500 deposit. There’s no check of the borrower’s credit history. The loans are popular partly because consumers can gain access to money quickly. The fee usually ranges from $7.50 to $10 per $100 borrowed. Guaranty Bank charges a flat $30 each time a customer applies for the loan. Repayment is required within 35 days. (See chart .)