The US banks that are looking at lower incomes from overdraft fees and debit cards are increasing their marketing tactics to focus on the provision of short term loans. This has prompted the interest of regulators who are starting to question banks as to whether they are on their way to providing the same risks to borrowers as the payday lending industry.
Firms like Wells Fargo and U.S. Bancorp are offering high cost loans, whereas their services are supposed to be for those people who have difficulty in obtaining other forms of bank credit, like customers of online payday lenders.
Is it in violation to the state’s interest rate cap?
Roy Cooper, Attorney General at North Carolina, asked Regions Financial for information showing that its loans are not a violation to the state’s interest rate cap. This scrutiny led to a decision by the Federal Deposit Insurance Corp. (FDIC) to investigate the payday-similar products that are being offered by the US banks. The Consumer Financial Protection Bureau (CFPB) also joined in on an inquiry of the same subject.
Cooper said that institutions are lending money at extremely high rates of interest and are getting re-paid at the next paycheck. He further added that these kinds of loans need to be prevented in North Carolina.
CFPB declared that payday loans can charge annual interest rates that can go to a maximum of 521% which traps consumers into a never ending debt trap. And online versions of these loans require that clients should directly debit the payments from their banking accounts.
Does US banks give this kind of loans?
5 banks, at least, are offering such payday resembling loans of online versions and the term payday is not used by these banks. The Wells Fargo loan is called Direct Deposit Advance, while Regions is marketing its loan as Ready Advance. The US banks are saying that they offer lower rates of interest in comparison with payday loans and they ensure that indefinite borrowings by customers cannot be renewed.
A study by the Center for Responsible Lending based in Durham, North Carolina, showed that banking products do have similarities that resemble payday loans. It illustrated that bank loans are structured in the same manner as payday loans where customers and borrowers get trapped in a multitude of payday advances every year.
Fifth Third Bank also offers payday resembling products that are a violation to state interest rate caps and the suit alleges, the federal Truth in Lending Act. Debra Decourcy, spokesperson for the bank refused to make any comments on pending litigation.
The US banks that do not separate their short term loans from their earnings while reporting results, are in search of methods that can replace the lost revenue. According to Fiserv, a firm that sells software package solutions to aid banks in marketing and managing their products, banks are focusing their efforts increasingly on short term loans. This way, they can serve a variety of consumers in much more cost effective methods.
The Relationship Advance software by Fiserv helps banks in identifying the customers that are most likely to be receptive to obtaining short term loans. CFPB is investigating if banks are marketing such programs in a way that is misleading and this investigation may lead to shrinkage in the revenue flow of the banks.
This software by Fiserv is displayed in the form of a button on bank accounts that are online.And when consumers click on it, the software takes them through an enrollment process.
As for the bank loans, Wells Fargo offers customers up to $500 in its Direct Deposit Advance, charging $7.50 on every $100 that are borrowed. Consumers are allowed to access a maximum of 6 consecutive loans and if they fail in making payments after those 6 loan amounts, Wells Fargo will not permit any more cash advances to the consumers until they have paid their debt in full.
So what do you think? Is it really a payday loan or not? Please comment here: