Pay day loans are a controversial type of lending which have led to some states banning them outright, whilst other states have introduced regulations to protect consumers. Due to the extortionate interest rates levied on so many cash advance loans, states which allow them introduced interest rate caps, thus preventing excessive fees.
Banks joined in the criticism of pay day loan lenders, even though many of their own products carried charges which were higher than a typical fee on a pay day loan. Going overdrawn to pay a bill could cost more in charges than the fee charged for obtaining a one off pay day loan. Naturally banks did not welcome the competition, and some of them have now joined them by introducing loans which are effectively pay day loans, with exorbitant charges.
Fifty Third Bank offers a loan to their customers which has been a popular choice. The stated APR is 120%, far in excess of standard bank rates, and surpassing even the rates of sub prime bad credit cards . Critics say that if the loans are repaid quickly rather than in the 30 day allowed period the interest charged actually equates to 650%. Borrowers must repay the loans within 30 days and the bank presents them as more cost effective to their customers than overdrafts. The fee is $1 for every $10 borrowed.
The bank can charge the high interest rate as banks are not subject to the capped interest rates which are imposed on payday loan lenders, thus neatly exploiting a loophole to muscle into payday loan territory. Similar loan products are available from Wells Fargo bank and U.S. bank. The National Consumer’s Law Center points out a distinct trend of banks moving into the pay day loan arena. They have been successful in contributing to the termination of Metabanks iAvance prepaid credit card.
Metabank skirted the law by introducing their iAdvance prepaid credit card. Loans were made available to customers who signed up for the prepaid cards, and then had either their pay checks, social security checks or unemployment checks, deposited onto the card. When the borrower received their next check then the loans were automatically repaid to the bank. The stated APR was 150%, but again critics said it was actually 650%. The fees charged were $25 per $200 borrower.
The bank automatically debited the full repayment of the loan as the borrowers check came in, regardless of their ability to pay. The loans were paid back with no regard to how much it left the borrower for food and other necessities. Effectively the bank was garnishing the checks upon receipt, but without a legal judgment. There is provision in the law allowing for a person’s needs to be met from their benefits, and the bank was disregarding this by automatically debiting the payments regardless of circumstances.
Metabanks iAdvantage card has just been terminated as the Securities and Exchange Commission ruled that Metabank was engaging in “unfair or deceptive acts of practice” with iAdvance.
Despite the new credit card reforms banks are still finding imaginative ways to extort high fees from their customers. The National Consumer’s Law Center will continue to bring attention to the growing trend of pay day bank loans issued by another name. They feel that the new laws do not address this increasing bank exploitation of loopholes and consumers are left without adequate protection.
Fifty Third Bank