The Final Call

Payday loan fees boon for banks

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“I think this is outrageous. These banks got billions in bailout funds and now it's business as usual,” Jim Campen, executive director of Americans for Fairness in Lending, told IPS.

Once the sole domain of freestanding, pay check cashing storefronts, payday loans are proven to send borrowers deeper into debt, while making massive profits for the lender, according to the National Consumer Law Center.

The Federal Deposit Insurance Corporation changed a rule in 2005 to allow banks to enter the lucrative market of payday lending. In 2008, the FDIC issued guidelines for bank payday loans, with a suggested cap of 36 percent interest.

Wells Fargo, U.S. Bancorp and other banks have chosen not to follow the voluntary guidelines and instead are charging triple-digit interest on payday loans to cash-strapped customers, according to consumer organizations.

Low-income families with little savings are especially vulnerable to these usury fees, said Chi Chi Wu, staff attorney with the National Consumer Law Center.

“The essential problem with triple-digit (interest) is it can dig borrowers into a hole,” Atty. Wu told IPS.

The $700 billion Troubled Asset Relief Program (TARP) for banks was created in October 2008, after former Treasury Secretary Henry Paulson said the U.S. needed to hand over the funds to banks to avoid certain collapse of the entire financial system.

Since then, the U.S. has given $441 billion in TARP funds to banks, plus an additional $2 trillion to banks, auto companies, insurers and financial firms through other Treasury programs, according to a report by the TARP Special Inspector General.

The Special Inspector General found that the banks were using the bailout funds for purposes other than to make loans, which was the intent of the program.

Wells Fargo, which received $25 billion in TARP funds, made close to $3 billion in profits between January and June 2009. It has not yet paid back its TARP loan.

At Wells Fargo, the loans are offered to people who have their paychecks automatically deposited at the bank. The bank provides advances on the paychecks, often to people faced with unforeseen bills, like health care.

The Wells Fargo Direct Deposit Advance Service lets people borrow half of their monthly income or a maximum of $500, for $2 for every $20 borrowed, which equals 120 percent annual percentage rate (APR) interest.

“It is designed to help customers get through an emergency situation—medical emergencies, a car repair, emergency travel expenses—by providing short term credit quickly,” Richele J. Messick, a spokesperson for Wells Fargo, told IPS in an email.

The advance and the fee must be paid out of the next paycheck, Ms. Messick said.

“Wells Fargo encourages all our customers to properly manage their accounts. However, emergencies do arise, and our Direct Deposit Advance Service can help customers when they are in a financial bind,” Ms. Messick said.

U.S. Bancorp customers who have direct deposit are offered payday advances of $20 to $500 at 120 percent APR that can be taken out instantly online or through an ATM.

Customers who direct deposit as little as $100 per month are eligible for these loans without approval, according to U.S. Bancorp, the eighth largest bank in the U.S.

Like Wells Fargo, U.S. Bancorp gets first access to a customer's pay check, before any other withdrawals or bill collectors.

U.S. Bancorp received $6.6 billion in TARP funds, and earned $529 million in the first three months of the year, and $221 million this spring, the bank said. It recently paid back its TARP funds.

The bank did not respond to requests for an interview.

Fifteen states outlaw loans that charge more than 17 to 36 percent interest, but the banks have found a loophole and they offer the triple-digit loans in all states.

Two bills in Congress would place a national cap on interest rates for consumer loans and auto loans. Sen. Bernie Sanders' legislation would cap interest rates at 15 percent, and Sen. Dick Durbin is proposing a 36 percent cap.

“We think (federal regulators) should crack down on this. We think what Wells Fargo and U.S. Bancorp is doing is not good,” Kathy Day, a spokesperson for the Center for Responsible Lending, told IPS.

“The way they disclose the interest and calculate it is a severe underestimate of the cost of the loan. If you borrow at the end of the month, the interest is four times that rate,” Mr. Campen said.

Related links:

Payday loans squeeze millions in fees (FCN, 04-10-2009)

How to avoid debt slavery (EconomicWarfare.org)