Big Banks Are Dropping Their Payday-Type Loans

This post comes from Nancy Dunham.

If you cringe every time you see someone take a short-term bank loan with drain-you-dry interest rates, relief is in sight.

The Wall Street Journal reports that Wells Fargo, U.S. Bancorp and Fifth Third Bancorp will phase out “deposit advance loans,” which consumer advocates have long contended drive debtors into deeper debt due to interest rates that may top 300 percent. The banks’ announcements came days after federal regulators said they would investigate whether the loans violate consumer protection laws.

Banks have defended the loans as needed financial lifelines for customers offered at lower interest rates than the payday loans that are often advertised by banners in storefront windows.

Last year we showed you Credit.com’s list of payday loan laws by state. At first glance, the interest rates seemed in line with those of credit cards: 17.5 percent in Alabama; 20 percent of the first $300, then 7.5 percent for the remainder in Colorado; and 16.75 percent in Louisiana.

The problem, of course, is that credit cards quote the amount debtors pay over a year. Payday lenders collect their interest in as little as a week, as do banks that offer deposit advance loans.

“Advocacy groups say deposit advance loans carry the same triple-digit interest rates and balloon payments as the payday loans offered by storefront and online operators,” reports The Washington Post.

The advocacy groups’ concerns are credited in part with federal regulators’ November warning to banks that they needed to assess customers’ ability to repay such loans, says the Post. The regulators also issued guidelines about such loans to the banks.

But it was an announcement by Comptroller of the Currency Thomas Curry, which encouraged “the banks we supervise to develop new and innovative programs to meet the small-dollar credit needs of their customers in ways that do not carry the risk of creating a cycle of high-cost debt,” that many believe resulted in the banks’ moves to discontinue or limit such loans, multiple sources report.

Don’t be surprised if you hear more about these loans in the near future. Although consumer advocates hail the move, those in the banking industry said it will drive financially strapped consumers toward unsavory lenders.