Banking on Payday Loans: Financial Institutions Get into Short-Term Credit Business

Article excerpt

For years, the payday loan industry has appealed to consumers with limited financial resources who needed immediate cash. Once the territory of pawnshops and check cashing services, payday loans have become a $42 billion-per-year economic giant over the past decade.

Most of the industry's products are offered by small, storefront operations that offer short-term loans, but some of the country's largest banks are financing those operations and, in some instances, offering their own version of payday loan products.

Oklahoma banks have yet to offer such loans, but the trend is growing nationwide. A new study from the National People's Action network and the Public Accountability Initiative, "The Predators' Creditors," shows how at least three of the country's largest banks have provided $3 billion in credit to the payday loan industry.

"Big banks provide $1.5 billion in credit to publicly held payday loan companies, and an estimated $2.5 (billion)-$3 billion to the industry as a whole," the report said.

Those companies - including Bank of America, JPMorgan Chase, US Bank and industry stalwart Wells Fargo - finance the operations of major payday lenders.

"Bank of America and Wells Fargo provided critical early financing to the largest payday lender, Advance America, fueling the growth of the industry," the study said.

According to the study, publicly traded payday lenders paid nearly $70 million in interest expense on debt in 2009, which the report called "a sign of how much banks are profiting by extending credit to these companies."

And today, large banks are doing more than just providing financing.

Stopgap financing

Some institutions, including industry giant Wells Fargo, now offer their own "payday"-style products.

According to Wells Fargo's website, the company offers a product known as Direct Deposit Advance, "a service that can help get you through a financial emergency by providing advance access to your next electronically deposited paycheck or other recurring direct deposit of $100 or more."

Direct Deposit Advance users may qualify for a line of credit up to $500, which can be deposited immediately into the customer's checking account.

Wells Fargo touts the product as a "service (that) may be helpful if you are experiencing a financial emergency and need money on a short-term basis," but it also notes the service is expensive and must be repaid quickly.

Wells Fargo advertises a fee of $2 for each $20 borrowed.

"This service differs from a payday loan in several important ways," said Wells Fargo spokeswoman Richele Messick. "Customers can't extend or roll over the advance because the advance and the finance charge are automatically repaid with the next qualified direct deposit. And it is only available to customers with established Wells Fargo consumer checking relationships and recurring direct deposits. We believe Direct Deposit Advance is a less expensive alternative to a payday loan. We also have policies in place to help ensure that customers do not use Direct Deposit Advance as a long-term solution."

Messick said the fee is less than those charged for the average payday loan, which averages $17 per $100 borrowed.

"It is designed to help customers get through an emergency situation - medical emergencies, a car repair, emergency travel expenses, etc. - by providing short-term credit quickly," she said. "It is an expensive form of credit not intended to solve longer- term financial needs. 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."

Although Wells Fargo and other large banks have financed and developed payday loan operations and products nationally, not all of those products are available in Oklahoma. …