Banks Jumping Into the Payday Loan Pool

There is a new kid on the block when it comes to payday loans.  Local bank branches are now offering what they dub “advance direct deposit loans, ” and they are drawing fire for it.  The reason is that the funds closely resemble the controversial payday loans offered by lenders specializing in the service.

The problem is that these loans are granted based on regular direct deposits that are known to be coming.  Though they are billed as short-term, they often cause borrowers to sink into long-term debt.  Consumer advocates argue that the chances of borrowers having funds left for bills and necessities for daily living, after the loan is paid back with interest and fees, is small.  Therefore, they are forced to continue taking these advances until they are trapped. A group of 250 consumer, community, and religious groups asked federal regulators in February 2012 to stop banks from offering these types of loans.

While the rising demand for short-term loans has led some banks to recently begin this practice, Wells Fargo has being offering this product since 1994.  The Consumer Financial Protection Bureau (CFPB) is now keeping a closer eye on banking institutions offering these types of loans the same as they are standard payday lenders.

The banks are quick to defend themselves, noting they are simply offering a legitimate service that meets a need for a portion of their customers.  Quick cash has become a common need for many, and banks offering this service maintain that the loans are monitored to ensure customers do not use them irresponsibly.  They also offer information in the form of literature and guides to their products stating that the loans are expensive and only meant to be a short-term solution.  One bank included bold print declaring how expensive the product is, and that it is only meant for short-term, unexpected credit needs. Customers are also warned not to borrow more than what they can pay from their next deposit.  Representatives at Wells Fargo maintain, “The service was designed to get customers through emergency situations, not to solve their long-term credit needs.”

What is the result of these banks jumping into the payday loan pool?  In January of 2012 the director of the CFPB noted that the agency would be paying special, close attention to the products as well as the banks offering them.  How it all plays out remains to be seen, but most maintain that despite lower fees, advances on direct deposits are still in the same class as payday loans.

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