Banks market these products, with names such as “Early Access” or “Ready Advance,” as short-term solutions for emergencies. But the average borrower took out at least 13 loans in 2011 and spent much of the year saddled with the debt, according to the study by the advocacy group. Researchers looked at a sample of 66 direct-deposit advances over a 12-month period.
Critics say the structure of advance-deposit loans promotes a cycle of debt. Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, triggering overdraft fees and additional interest.
Officials at Wells Fargo say the bank leaves its customers a $100 cushion in cases where the deposited funds are not sufficient to repay the advance. The bank, which rolled out the product in 1994, offers an installment plan for customers to avoid balloon payments. But it is offered only to people with at least $300 in outstanding debt who have been hit with balloon payments for three consecutive months.
“We’re very clear that this is an expensive form of credit and not to be used as a long-term solution,” said Wells Fargo spokeswoman Richele Messick. “We are very upfront and transparent with our customers about this service.”
Not everyone agrees. One Wells Fargo customer who spoke to researchers for the report said she had not been aware of the full range of fees attached to the payday loan. The 69-year-old widow, who declined to give her full name, took out a $500 payday loan five years ago that has cost her $3,000 in fees. Wells has given the woman 25 loans in the last two years alone.
Banks contend that they are offering a vital service to customers at more reasonable price points than storefront lenders, who often charge twice as much as banks.
“We assist our clients in better controlling his or her finances through significantly cheaper costs and with more transparency and more regulation than traditional payday lenders,” said Sheila Curley, a spokeswoman for the Bank of Oklahoma.
The bank began offering direct deposit advance nearly two years ago, she said, because “there is a genuine need to offer relief during a financial emergency to consumers without access to credit.”
Consumer advocates are concerned that federally regulated banks can sidestep stricter state laws that govern payday lenders. At least 15 states have banned the service, while several others have imposed tougher laws to limit the number of loans that can be made and the interest rates.
The Consumer Financial Protection Bureau has supervisory and enforcement authority for storefront and bank payday lenders with more than $10 billion in assets. Officials at the bureau say they are monitoring the market. The bureau issued a request for comment last year to gauge consumer and industry concerns.
Earlier this year, a group of senators, including Chuck Schumer (D-NY) and Sherrod Brown (D-Ohio), called on federal regulators to bar banks from providing payday loans of any kind. The lawmakers said the products are tantamount to predatory lending.
The new report is similarly urging the three banking regulators to issue guidance or a rule that would immediately ban such direct-deposit advances before the practices spreads from a handful of banks to the entire system.
Twelve million Americans use payday loans a year, taking out an average eight loans for $375 and spending about $520 on interest, according to a July report by the Pew Charitable Trusts. The think tank found that most borrowers use payday loans to cover living expenses such as utilities or rent, not unexpected emergencies. The average borrower is indebted about five months of the year.