U.S. banks including Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB) are offering payday loan-style short term lending options for checking account holders at interest rates as high as 120% as they seek to replace more than $15 billion in lost revenue from new regulations in the Credit CARD Act.
Banks are looking to rebrand overdraft protection policies that came standard on checking accounts until the passage of the Credit Card ACT. Fifth-Third Bancorp, Wells Fargo and U.S. Bancorp are all already making these high-interest payday loan-like products. This group of products, known as “checking advance products”, offer loans to consumers between $100 and $500 at annual interest rates of 120% if they are repaid in 30 days.
The terms that banks are offering in checking advance products are very similar to financing companies that offer payday loans. The loans typically are short term loans made to customers that don’t have credit cards to bridge the gap until their next paycheck arrives.
Some believe that these loans may actually be worse than getting a payday loan from a financing company. Lauren Sanders, managing attorney with the National Consumer Law Center in Washington, recently commented to Bloomberg that banks have direct access to consumer’s accounts, meaning that its loans will be paid before the borrower buys food, pays their mortgage or utility bills.
“They’re looking for ways of replacing their overdraft income,” Saunders said. “Instead of pricing their products openly and up-front, they seem addicted to back-end ways of making profits.”
