Tuesday, January 23, 2007

They advertise some loans at 120 percent annual interest, but may charge up to an astronomical 3,650 percent. The personal loans are available at locations every few blocks. Some consumer groups blast them as taking advantage of the unwary.

That not only describes payday lenders, whose neon-bright signs and quirky TV ads target the poor with very high-interest loans. It also describes Wells Fargo Bank, U.S. Bank and other mainstream banks, which offer high-interest loans benignly called “deposit advances” or “courtesy overdraft protection.”

“I always wondered why it was so important to them that we not mess with” trying to cap interest rates on bad credit payday loans, said Linda Hilton, director of the Coalition of Religious Communities and a major opponent of payday lenders.

“I finally realized that some of them are essentially payday lenders themselves,” said Hilton, an advocate for the poor. “And even a high interest-rate cap on payday loans might affect some of their business, too.”

For years, Hilton has unsuccessfully lobbied the Legislature for an interest-rate cap on payday advance loan lenders. They charge a median of 521 percent annual interest in Utah; she sought a cap similar to the 36 percent interest limit that Congress last year imposed on payday loans made to families of military members.

However, she said banks were a main opponent to any local payday loan caps, arguing they might open the door for limiting other types of loans, too, instead of letting the market determine rates.

Banks always prevailed — and Hilton says she can find no legislator interested in pushing a faxless payday loan rate cap for now. Banks are among the state’s most powerful lobbying groups. They donated at least $147,266 to current legislators in the most recent elections, or about $1 of every $25 that they raised. That averages to more than $1,400 in donations per legislator.

New products … New payday loans?
Recently, national consumer groups started noting that banks increasingly are offering some products that have interest as high as payday cash loans — and, like Hilton, the groups questioned whether that may be why some banks have fought interest-rate caps.

For example, Wells Fargo Bank locally offers “direct deposit advance service,” which is nearly identical to what U.S. Bank calls a “checking account advance.” Websites for both banks say loans through those services cost 120 percent annual interest, but it could end up to be much higher, depending on how fast a loan is repaid.

The services are for customers who regularly have a paycheck or other deposits made through electronic direct deposit. They may receive cash advances on such deposits at a flat fee of $2 per every $20 loaned, no matter how long the advance is unpaid, up to 35 days. Such advances are available through automated teller machines, by calling the bank or online.

Whenever their next direct deposit of $100 or more is made — even if it is the day after the loan was issued — the loan balance and fees are automatically deducted.

So, the $2 fee per $20 loan in the case of a one-day loan would actually be 3,650 percent annual interest. The 120 percent interest that banks advertised is for a loan that is paid off in a month.

The banks require such payday advances to be paid off within 35 days and may transfer funds from other accounts of the debtor to cover it if not paid on time — and nonpayment could lead to charges for insufficient funds in accounts.
‘Absolutely different’: Still, Wells Fargo spokesman Mark Chapman says that service “is absolutely different than a payday loan.”

He said it has three main differences from cash advance loans.

“Customers cannot extend or roll over the advance — it is automatically paid at the next deposit. Next, the advance fee is less than the average payday-loan fee. Finally, it is only available to customers who have an established relationship with Wells Fargo … and have accounts in good standing.”

He adds, “This is intended to help customers get through emergencies by providing them with short-term credit quickly. It is not intended to be used as long-term credit.”

Click here to read the rest of this Deseret News article.

This entry was posted on Tuesday, January 23rd, 2007 at 3:17 pm and is filed under Utah.