Payday Loan Times

Call it an emergency faxless cash advance. Call it “proactive” overdraft protection. Just don’t call it a payday loan.

At least that’s how U.S. Bancorp and Wells Fargo & Co. prefer it.

The two companies offer direct-deposit checking customers cash advances on future paychecks. The two banks charge a 10 percent fee for loans up to $500, which is automatically repaid when the customer’s next paycheck is deposited in the account.

Payday loan lenders, by contrast, have an upfront charge of anywhere from 15 to 25 percent per loan.

Trent Spurgeon, vice president of product and segment management for Minneapolis-based U.S. Bancorp, justified the company’s 10 percent fee, noting that it is less than half of what traditional payday advance lenders charge, which includes “hidden costs” such as late penalties and renewal fees.

Moreover, he said, U.S. Bancorp offers the service to all direct-deposit customers, regardless of their credit histories.

Nevertheless, the direct-deposit loans are very lucrative for the banks, experts say. U.S. Bancorp and Wells Fargo earn an annual interest rate of about 120 percent on each loan. Plus there is little risk to the banks because they automatically deduct the money from the consumer’s direct-deposit account, said Bart Narter, a banking analyst with Celent, a management and consulting firm in Boston.

“I think they will make a bundle out of it,” Narter said.

Neither U.S. Bancorp nor Wells Fargo will disclose specific numbers related to the programs, calling such data proprietary.

Bank officials say the cash loans, dubbed direct-deposit advances, are strictly meant for emergency needs, such as car repairs or medical expenses.

The service is “a quick and simple solution to people who have no immediate access to other forms of credit,” Spurgeon said.

Cash-strapped consumers can also use the loans to prevent overdraft fees from bounced checks, he said.

“Payday loans carry certain [negative] connotations,” Spurgeon said. “We serve the same needs, but the products are different.”

For one thing, U.S. Bancorp, which rolled out the product about a year ago, is very clear about the terms and conditions of the loans, he said.

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The names are catchy: MyCashNow.com. PayDayOK.com. But the details of these payday loan online lenders can be controversial.

In Minnesota,credit counselors say the Internet operators, a new part of a $25 billion lending marketplace, are also bypassing state laws on payday loans and leading thousands of Minnesotans into deeper financial trouble.

"With online loans, they're greasing the skids so people slide into boiling oil that much faster," Darryl Dahlheimer of Lutheran Social Service Financial Counseling in Minneapolis told the Star Tribune. "The ease of access and the anonymity allow people to get into trouble with much less oversight."

Inside the state payday loan law: Minnesota law limits payday loans to $350 and caps the interest rate at about 200 percent annually, or $23 on a loan of $300. The law also prohibits lenders from rolling over these cash advance loans. This is how most people fall deeply into debt.

Internet lenders, however, offer loans as high as $1,000 and some charge interest rates of more than 1,000 percent annually, or $93 every two weeks on a $500 loan. Borrowers must give the lender electronic access to their bank accounts. It's a stake contrast to storefront lenders in Minnesota, as providers of online payday loans operate with no state oversight. Many are based overseas or in states with minimal banking regulations.

"If they're not domiciled here - if there's no bricks and mortar - we don't have anything to go after," said Bill Walsh, a spokesman for the Minnesota Department of Commerce, which enforces lending laws.

The result is that lenders can do things on the Internet that would be illegal if they did them in person. That makes no sense, said Prentiss Cox, a former Minnesota assistant attorney general who heads the legal clinic at the University of Minnesota Law School.

"If they're making the loan to Minnesota residents, there's no reason that Internet payday lenders shouldn't be complying with the laws," Cox said. "There's nothing magic about the Internet that exempts these people."

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