Big banks are getting into the payday lending business, creating competition for the storefront operators and stirring the ire of consumer advocates.
The banks call it a convenience for customers facing unexpected bills. Critics say the banks are luring the unwitting into an expensive cycle of debt.
In the St. Louis market, at least three banks will make customers a payday-like loan through their checking accounts: US Bank, the biggest player in the local banking market, Regions Bank and Fifth Third Bank.
Banks often call them "advance" loans. They typically charge $10 for every $100 lent, and they collect from electronic deposits of paychecks or Social Security. Storefront payday shops charge an average of $17 for a two-week loan of $100, according to figures from the Missouri Division of Finance.
Now, consumer groups are aiming the same flak at banks as they aim at payday lenders. The main concern is not a $10 charge on a $100 loan; it's that customers often can't afford to pay their family bills after the loan and fees are deducted from their checking accounts. So, they take out a new loan.
That's what happened to Natalie Hill of south St. Louis, who says she borrowed several times from US Bank.
"I probably never would have gone to a payday loan store, but the bank made it so much more convenient to just click on the computer," she said.
Hill earns about $30,000 a year, which means living paycheck to paycheck. She took out her first loan to pay a utility bill.
"I thought, 'These are decent people. They're the bank. They're not one of the bad guys who set up shop in the middle of the night,'" she said.
But the loan payment left her short on other bills, so she had to take another loan, at another 10 percent fee. The cycle repeated and it became a habit. "You're short for the rent, the car note. Once you go in there, you never get ahead," she said.
Eventually, she decided to "bite the bullet" -- cut expenses to the bone so she could stop borrowing.
Consumer advocates say her story echoes the payday loan business.
"If you don't have $300 on Tuesday, you won't have $345 in two weeks," says Rep. Mary Still, D-Columbia, who has been waging a rather lonely battle in the Missouri Legislature against the storefront payday business.
The payday loan business is perpetually under fire. In Missouri, consumer groups are gathering signatures to put a referendum on the ballot, sharply limiting payday interest rates.
Meanwhile, some local credit unions have come up with an alternative -- requiring that short-term borrowers make deposits in a savings account with every loan, in hopes of breaking them out of the debt trap.
Regions Bank said its customers are "highly satisfied" with the bank's payday-like loans, which are for amounts up to $500.
US Bank held focus groups to test consumers' reaction to the loans.
"The biggest point they make with us is that they feel much more comfortable asking the bank for an advance," said spokeswoman Teri Charest.
Banks require a customer to have a checking account and a regular direct deposit -- usually a paycheck -- to get a loan. That gives banks an advantage over payday shops; banks have less trouble collecting.
If the paycheck doesn't arrive, or isn't enough, the bank will withdraw the money anyway after 30 days or so -- even if that overdraws the customer's checking account. That can result in overdraft charges, averaging about $30, as other checks arrive.
Some banks let borrowers in trouble convert to longer term payment plans, usually for a fee. Regions charges $50, plus interest at a 21 percent annual rate. Some payday shops offer similar options.
The banks also impose "cooling off" periods on customers who have been in debt for several months. Regions, for instance, requires a one-month break after six months of borrowing.
Still, those differences don't satisfy consumer advocates.
"Banks making payday loans claim their product is different from a loan from a payday shop, but it's not," said the Center for Responsible Lending in a recent report. "Payday loans made by banks have all the hallmark characteristics of payday loans made by payday shops."
The center, an advocacy group based in North Carolina, studied records for 55 customers with bank payday loans. The typical borrower takes out 16 loans and stays in debt for 175 days a year, according to the study.
It found that 44 percent of a customer's next deposit goes to paying off the loan.
"This large proportion no doubt contributes to the long-term debt cycle experienced by many payday borrowers," the center said.
However, Fifth Third says its payday customers are generally better off than patrons of the payday shops. Most are middle-class people with family income over $54,000, said Royce Sutton, Fifth Third's vice president for community development.
"Our product is intended for a person who may have an emergency or an unexpected expense," he said.
The bank declined to say how many customers take out new loans to replace those paid off. The bank makes money on the loans, Sutton said, although he didn't know the amount.
"We have to price it for a degree of risk," he said.
365 percent interest
Missouri and Illinois sets limits on such loans, which must be followed by payday loan operators and state-chartered banks. But US Bank, Fifth Third and Regions are nationally chartered banks. Federal bank regulators have no set limits on payday loan charges, except for military borrowers.
Regulators use "annual percentage rates" to judge the expensiveness of loans. That's the amount of interest a borrower would pay if he kept the loan for a year. Since payday loans aren't kept that long, there's disagreement over how APR should be measured.
Payday loan shops charge an APR averaging 444 percent, according to the Missouri Division of Finance, assuming two-week loans. The Center for Responsible Lending says banks charge a 365 percent APR, saying that the loans last an average of only 10 days until paychecks arrive.
But Fifth Third says its APR is actually as low as 120 percent, considering that the loan might be out as long as a month if paychecks don't cover the loan.
The Treasury Department, which regulates national banks, proposed new rules for bank payday lenders in June. The rules don't limit fees or interest. But they do require that banks explain to customers how the program works and to warn them that it can be costly and require cooling-off periods. Banks also wouldn't be allowed to collect more than the amount in the account, throwing the customer into an overdraft.
A few St. Louis credit unions, including Gateway Metro Credit Union, jumped into the small-dollar loan business in recent years, but they added a twist. A percentage of what you borrow must be deposited in a savings account under the customer's name.
St. Louis Community Credit Union, for instance, gives small dollar loans for 90 days at an APR of 25 percent, plus an annual fee of $25, which covers all loans during the year. On a typical $450 loan for three months, the interest would be $28. Ten percent of each loan goes to a savings account. The idea, said CEO Patrick Adams, is that the savings account will grow as the customer keeps borrowing until they no longer need a loan.
"At that point," he said, "you get off the treadmill."
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