When Wells Fargo turned down Annette Smith, a 69-year old widow living off of social security, for a small personal loan to get her car fixed, the bank recommended its online Deposit Advance Program. With the click of a button, she got the $500 she needed. But the short-term, high interest loan ensnared her in a vicious years-long cycle of borrowing.
As soon as Smith’s social security check hit her account, Wells automatically deducted the full amount of the advance plus a $50 service fee. That amounted to more than half her income, and with no friends or family in a position to help and the bank refusing to let her pay in installments, she had no choice but to keep taking deposit advances to make ends meet. “A few times I tried not to take an advance, but to do that, I had to let other bills go. The next month those bills were behind and harder to pay.” By the time she finally broke the cycle with the help of the California Reinvestment Coalition, she had paid nearly $3000 in fees on 63 advances over 5 years.
Smith testified at a payday-loan briefing session held by the Senate Special Committee on Aging. “I never considered going to one of those payday loan stores,” she said, “because I knew they had a reputation for charging really high interest rates. I thought that since banks were required to follow certain laws, they couldn’t do what those payday loan people were doing.” She found out the hard way: banks have their own payday-loan style products, and they aren’t necessarily any safer than the storefront kind.
“Banks call these deposit advances, but they are designed to function just like any other payday loan.” Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending, told the committee. Deposit advance users remain in debt an average of 212 days a year, she said. On average, they “end up with 13 loans a year and spend large portions of the year in debt even as banks claim the loans are intended for occasional emergencies.”
Richard Hunt, President of the Consumer Bankers Association, said it was wrong to equate deposit advances with payday loans. Payday lenders offer their high-interest products to anyone, he explained, while banks like Wells provide deposit advances as a “service” to established customers, charging “line of credit fees” instead of interest.
Senator Joe Donnelly (D-Ind.) asked Hunt if he considered it appropriate “for some of the most respected banking names to be making 200% plus off of their customers.”
Deposit advance customers aren’t paying interest at all, Hunt insisted. But as Borné pointed out, the fees work out to the equivalent of up to 200% in annual interest, and banks that make such loans generally structure them to avoid standard interest-disclosure requirements.
Hunt was asked whether a customer with an “established relationship” might be entitled to a bank’s help in finding better ways to borrow. Banks “text people, mail people, and do everything but fly a helium balloon over their heads saying there could be a less expensive item,” Hunt replied. “At the end of the day it’s up to the consumer to choose which product they want to have.”
Wells Fargo is one of six banks that “have now joined the ranks of the payday lenders,” Borné testified. “These banks make payday loans even in states where laws clearly prohibit payday lending by non-banks…” There’s a danger, she added, that bank payday lending will spread until it becomes the norm. “We are at a tipping point,” she warned.
— Mitch Margolis
- Triple-Digit Danger (Center for Responsible Lending, 3/21/13)
- Regulators to Restrict Big Banks’ Payday Lending (New York Times, 4/23/13)
- AFR Letter to FDIC and OCC (5/30/13)
- The Payday Playbook: How High Cost Lenders Fight to Stay Legal (Pro Publica, 8/2/13)