by Broderick Perkins
(8/10/2011) There's a new loan shark in town.
It's your friendly neighborhood bank offering loans that carry an annual percentage rate (APR) averaging 365 percent, based on the typical loan term of 10 days, according to the Center for Responsible Lending.
Big lenders are offering the short-term loans to checking account holders who use a direct deposit feature. Customers get direct deposits from employers, the Social Security Administration, and other sources in lieu of payroll checks or other forms of paper payments.
Customers are allowed to borrow against the deposits before they are actually deposited. The bank deposits the loan amount directly into the customer's account and then repays itself by deducting the loan and interest and fees directly from the customers next incoming direct deposit, the Center says.
Banks attempt to differentiate their product by calling them "direct deposit advances" or "checking account advances," but the loans are structured like loans from payday shops, which often put borrowers on a treadmill of debt.
If within 35 days of the loan, the direct deposit is short of the loan and interest due, the bank repays itself anyway, even if the repayment overdraws the consumer's account, triggering still more fees and forcing the borrower to tap the till again.
Using checking account data tracked by Lightspeed Research Inc., the Center analyzed the bank payday loan activity of 614 checking accounts, over a 12-month period.
The findings include:
Long-term indebtedness. Bank payday loan borrowers, on average, are in debt for 175 days per year, nearly twice as long as the maximum length of time recommended by the Federal Deposit Insurance Corporation (FDIC).
Shrinking direct deposits. On average, 44 percent of bank payday loan customers' next deposits go toward repayment of their loan. The large take contributes to a long-term debt cycle.
Bank payday loans target older customers. One in four bank payday loan borrowers are Social Security recipients, who are 2.6 times as likely to have used a bank payday loan as all bank customers. On average, 33 percent of a Social Security customer's deposit goes toward outstanding bank payday loan and fee.
Bank payday loans circumvent state and federal laws. Some states outlaw payday loan lending or put interest rate caps on the loans, but two national banks operate in states with interest rate caps, claiming permission under federal law. Banks likewise structure payday loans to evade federal interest rate cap rules designed to protect the active-duty members of the military.
The Center recommends: "Payday loans...damage consumers' balance sheets, drive families out of the banking system, and pose serious legal and reputational risks to banks -- all of which ultimately threaten banks' deposit bases. Federal banking regulators, especially the Office of the Comptroller of the Currency and the Federal Reserve, who supervise banks making payday loans, should immediately take meaningful steps to address this product."
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