In a somewhat surprising move, banks are considering expanding their loan offerings to include payday loans. It is surprising because companies offering this type of loan have been under scrutiny and a lot of criticism for charging exorbitant interest rates for payday and Refund Anticipation Loans (RALs).
Now it seems the local bank may begin offering small loans to consumers with terms that include as much as 120 percent interest rates. The reason they are considering these kinds of loans is because there are new Federal Reserve regulations going into effect on July 1 that limit the amount and number of overdraft fees that can be charged.
The new Federal Reserve rules are expected to cost the banks $15 billion in revenues and that is why they are looking for ways to replace that lost revenue. The loans would be very small and would usually range from $100 to $500. These loans target people who do not have a credit card and need a small amount of money for expenses that need to be covered before the next payday rolls around.
Payday loans will not be called payday loans though because the term “payday loan” has too many negative connotations. The term makes people think of loans that kept workers in debt from paycheck to paycheck and would consume paychecks with fees and interest rates. But a rose by any other name is still a rose, or what is more likely is that consumers may see these new bank products as thorns. The exorbitant interest rates charged by payday lenders will still be charged by the banks and that is not good news for consumers.
The new Federal Reserve rules prohibit banks from charging overdraft fees to consumer accounts when they overdraw their credit limits or account balances at automated teller machines. The fact that banks will lose $15 billion in fees beginning July 1 tells you how many times consumers are borrowing money in excess of their current cash or credit availability.
The National Consumer Law Center (NCLC) in Washington is not pleased with the new loans at banks. The loans are already being implemented at Wells Fargo & Co. and U.S. Bancorp. In the opinion of the Law Center, the loans target the low income and the financially stressed and will be paid off by a withdrawal from the consumers account. This payment method may sound reasonable, but what it means in reality is that the loan payment will be made and possibly use funds needed for a house payment or food.
Some banks, like U.S. Bancorp, are warning consumers that the payday type loans are expensive forms of credit. Once approved, the consumer can borrow $20 up to an amount pre-determined at the time of approval. For each $100 borrowed there is a $10 fee. Consumers approved for these loans usually have paychecks that are direct deposited so the bank is assured of getting its money back. As U.S. Bancorp the program is named the “Checking Account Advance” and at Wells Forgo it is called the “Direct Deposit Advance Service”.
Normally fees will be higher on loans made to consumers who do not have their paychecks direct deposited because the bank is assuming a higher risk. Some banks limit their payday loans only to existing customers who have a good track record of checking account management.
The payday loan stores are not happy about banks making these kinds of loans. The banks are regulated by the Federal Reserve and can charge any interest rate deemed appropriate. The payday loan stores are regulated by the states and most states have place limits on the interest rates that can be charged.
As would be expected, consumer advocate groups do not like any loans they see as gouging desperate people. It doesn’t matter if a payday loan is made by a bank or a money store in their opinion. It is still a loan that can become a debt trap the first time a payment cannot be met.
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