Traditional payday lenders charge an average of 391% APR. By those standards, the “direct deposit advance service” from Wells Fargo appears to be a bargain at just 270% APR. But then again, that is still about 70 points higher than a typical loan shark would charge.
Big banks such as Wells Fargo are increasingly joining smaller banks like Regions Bank to replace revenues that were lost by recent banking regulations. Caps on debit card interchange fees have pushed banks to explore other options, such as monthly fees on checking accounts. To further increase profits, many banks are moving into the lucrative short-term loan market that was previously dominated by payday lenders and some consumer finance companies.
Both Wells Fargo and Regions Bank have found themselves targeted by the Center for Responsible Lending (CRL) as well as other consumer groups. CRL wants these predatory loans to weigh negatively on the Consumer Reinvestment Act (CRA) ratings of those banks. Satisfactory CRA ratings are critical for banks who want to gain regulatory approval for mergers and acquisitions.
While CRL has been lobbying against the payday loans offered by Regions Bank (with support from the Z. Smith Reynolds Foundation), it has also taken an active role in petitioning the Office of the Comptroller of the Currency (OCC) to reduce CRA credits for Wells Fargo.
Regions Bank has begun offering payday loan style products at 350% APR to North Carolina residents, even though the General Assembly previously outlawed payday loans in North Carolina. Regulators within the Office of the Attorney General have expressed dismay that they lack the means to effectively protect the most vulnerable citizens of North Carolina from predatory lenders that often rely on loopholes to preempt state laws that outlaw such usurious lending practices. While other states such as West Virginia have successfully defeated payday lenders (Western Sky, Government Employees Credit Center, and Frontier Financial Group as a collector for a payday lender) that attack from across state lines, North Carolina and other states have shown an unwillingness to go after potential violators.
Alternatives to high-interest payday loans can save hundreds of dollars a month in extra interest. Many debtors never realize the better options though, as they fall for the gimmick of guaranteed money. Only governmental action can protect those who know no better from falling for the debt traps offered by predatory lenders. The argument may also be made that when traditional lenders begin offering predatory loan products, that it blurs the lines between favorable lenders and predatory lenders. It is no wonder that consumers get confused, leading them to pay far more than they should to borrow.
Tip: Follow the Center for Responsible Lending by signing up for their email updates or by following their Twitter account (@CRLONLINE).
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."