San Francisco, CA (PRBuzz.com) November 19, 2012 -- Lower revenue is causing banks to increase their marketing efforts of small short-term loans. The lower revenue is due to debit-card and overdraft fees. The move is prompting regulators to question whether they carry the same risks to borrowers in comparison to other forms of payday lending.
The judicial system also took notice in August when a private lawsuit was filed in U.S. District Court in Ohio, claiming that Fifth Third Bancorp deceived customers regarding the true costs of its short-term loans.
Traditional storefront payday loans are secured by a check that is post-dated to a borrower's next payday. Online payday loans require clients to have payments directly debited from their bank account(s). The loans prey on low-income people by concealing costs and trapping them in an expensive debt cycle, according to consumer watch groups.
The Consumer Financial Protection Bureau says traditional payday loans can carry annual interest rates as high as 521%. The cost is usually expressed by converting the fees into an annual percentage rate. For example, a two-week $100 loan carrying a $15 fee would have a 390% APR.
On the positive side, banks that offer these short-term loans do not use the term "payday." The Regions loan is called Ready Advance while Wells Fargo calls its loan Direct Deposit Advance. Banks say they offer lower interest rates than traditional payday loans and that they make sure customers cannot renew borrowing indefinitely. Regions' customers have given strong positive feedback over the short-term loans, wrote Jeffrey Lee, the bank's executive vice president, in an Oct. 4 letter to North Carolina officials.
In a study by the Durham, N.C.-based Center for Responsible Lending, the center analyzed how 55 customers used the loans. It concluded that the customers took out an average of 16 loans annually, paid an average annual interest rate of 365%, and spent more than half the year in debt. The reported stated that these loans are structured just like loans from payday shops in which borrowers are usually stuck in multiple payday loans per year.
Banks are researching ways to replace revenue lost to regulations, including stronger enrollment criteria for overdraft programs and a 2010 Federal Reserve rule limiting debit-card swipe fees. Wells Fargo has put limits on its Direct Deposit Advance loan - $500, and a $7.50 charge per $100 borrowed. Up to six consecutive loans may be taken out by customers. Borrowers that fail to bring their account to debt free after those six loans will not be permitted to take cash advances until the debt is paid in full.
Banks may be attracting the same kinds of customers who use traditional payday lenders. According to Lee, Regions has calculated that about 50% of its customers who use Ready Advance earn more than $50,000 per year, and 24% earn more than $75,000.
About Payday Ninja:
Payday Ninja (http://www.paydayninja.org/) provides a quick and convenient way for people to access the money they need from the comfort of their own home. Borrowers are provided with small, short term loans that can be used for any purpose. No credit check loans can be provided and completed in less than 24 hours.
Owen Nicholas Brooks