The Center for Responsible Lending, an affiliate of the $410 million Self-Help Credit Union in Durham, N.C., has issued a report attacking six banks for continuing to offer loans it says carry very high interest rates and behave like payday loans.
The six banks are Wells Fargo, U.S. Bank, Regions, Fifth Third, Bank of Oklahoma and its affiliates and Guaranty Bank.
None of the banks named has yet responded to requests for comment on the report, but Wells Fargo has a Frequently Asked Questions document on its website about its Direct Deposit Advance program, the loan program named in the center report.
“It is important to note this service is an expensive form of credit designed for short-term borrowing needs,” the Wells Fargo FAQ reads. “Alternative forms of credit may be less expensive and more suitable to your long-term financial needs. Talk to your Wells Fargo banker for more details.”
Triple-Digit Danger: Bank Payday Lending Persists is an update of a similar report that the CRL prepared in 2011. In that report, the organization alleged payday lending taking place, under different names, at the six banks. The new report updated the last by indicating that the lending was still going on and documenting some of its effects.
First, interest rates on the money are still very high. According to the report, an average 12-day loan at one of the banks would run between 225% and 300%.
Second, the median number of loans that an average borrower would take out is 13.5 while more than 33% took at more than 20.
Third, depositors that use the loans are twice as likely as others to incur overdraft fees and more than 25% of borrowers also receive Social Security payments.
The report also blames the loan's structure for helping to force borrowers into taking out multiple loans.
“The fundamental structure of payday loans—a short loan term and a balloon repayment—coupled with a lack of traditional underwriting makes repeat loans highly likely,” the report contended.
“Borrowers already struggling with regular expenses or facing an emergency expense with minimal savings are typically unable to repay the entire lump-sum loan and fees and meet ongoing expenses until their next payday,” it said.
“Consequently, though the payday loan itself may be repaid because the lender puts itself first in line before the borrower’s other debts or expenses, the borrower must take out another loan before the end of the pay period, becoming trapped in a cycle of repeat loans,” the report said.
The report acknowledged that the banks assert that they have safeguards such as installment payments in place to keep the loans from becoming too financially burdensome. But the report charged the banks make the safeguards too difficult to use and that the number of loans per borrower strongly suggested they were ineffective.
In Wells Fargo's case, for example, the report said the installment loan program is only open to borrowers who have already taken out three conventional direct deposit advance loans and owe more than $300 on existing loans.
The report calls on federal financial regulators to shut down the loan programs as they are currently structured and only allow them to restart under terms much more favorable to borrowers, including allowing what it called “affordable” installments and capping interest at 36%.