Banks offer payday loans for quick cash

Published: 15th April 2009
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Fifth Third Bank and U.S. Bank - respectively the fourth and eighth largest Nashville banks by deposits - have programs offering 35-day payday advance loans to customers with direct deposit paychecks. The loans come with an annual percentage rate of 120 percent, or a 10 percent fee on money borrowed.

That's a rate much higher than almost any other form of credit, other than businesses that offer pawn, title or unsecured payday loans, which often charge fees as high as 400 percent APR.

It's unusual for credit cards to have APRs much higher than 30 percent. But for paycheck advances, both at banks and payday lenders, no credit check is required. Tennessee law does require anyone receiving a payday loan to have a checking account and a job with a paycheck.

"The big difference is that this product is a feature you add to your existing checking account," says Mark Erhardt, senior vice president for retail products at Fifth Third.

While the bank certainly has a profit motive in beginning the program, it's also offering a service that competitors do not, Erhardt says.

The Cincinnati, Ohio-based Fifth Third began developing the program in late 2007. The bank introduced the product in most markets, including Tennessee, last fall under the title "Early Access Checking," Erhardt says.

Erhardt declined to say how many customers had used or signed up for the service, or how much money the bank has made on the program. He did say that so far, few customers have repeated use of the service.

Another difference from traditional payday lenders, banks require a direct deposit paycheck from the customer and take the cost of the loan out of that check before it is deposited into the customer's account. That means little chance of late charges on the loan, but it also means the bank will get paid before any other bills or expenses.

While the rates may be lower than payday lenders, the banks' paycheck advances have all the same hallmarks of predatory lending, including triple-digit APRs on programs that target those in financial trouble, says Uriah King, a legislative analyst with the Center for Responsible Lending, a North Carolina-based consumer advocacy group.

That's not surprising, he says, in a time when many banks are in financial trouble themselves. Cash Out Refinance Loans

"This is one more way that banks can extract fee income from people that can afford it least," he says. "... Though it's purported to fix people's problems in these situations, it really just digs them deeper in a hole."

He says banks have increased the portion of their income drawn from fees such as overdraft fees. A November report by the Federal Deposit Insurance Corp. showed that in 2006, banks had collected $1.97 billion in fees for insufficient funds and overdrafts - 74 percent of all fees collected by the banks.

The payday advance is a relatively new industry, with regional and national companies developing in the 1990s. Community Financial Services Association of America, a payday loan industry group, estimates there are 2,200 payday lending stores nationally, making $40 billion in short-term loans annually.

Jabo Covert, vice president of Cleveland, Tenn.-based Check Into Cash, the largest and one of the oldest payday advance businesses in the country, says he welcomes the bank competition.

"I always laugh and ask them what took them so long," he says.

The FDIC launched a pilot program in 2008 with 31 banks offering "small dollar loans." The program follows guidelines that cap the APR at 36 percent.

Fifth Third, however, didn't use these guidelines because its program was already in the pipeline, Erhardt says. U.S. Bank and Wells Fargo also had programs set up before the guidelines were issued.

U.S. Sen. Dick Durbin, D-Illinois, introduced a bill to Congress in February that would establish a 36 percent APR cap on personal credit - a move that has been opposed by payday lenders. Similar legislation has been considered by some Tennessee lawmakers.

One thing that Erhardt, Covert and King all agree on is that more banks are likely to get into the payday loan market in the next few years. The FDIC said last year it was aware of 41 banks nationally developing payday advance programs. Cash Out Refinance Loans

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