MINNEAPOLIS - Call it an emergency cash advance. Call it "proactive" overdraft protection. Just don't call it a payday loan.

At least that's how U.S. Bancorp and Wells Fargo & Co. prefer it. The two companies offer direct-deposit checking customers cash advances on future paychecks. The two banks charge a 10 percent fee for loans up to $500, which is automatically repaid when the customer's next paycheck is deposited in the account. Payday lenders, by contrast, have an up-front charge of anywhere from 15 to 25 percent per loan.

Trent Spurgeon, vice president of product and segment management for Minneapolis-based U.S. Bancorp, justified the company's 10 percent fee, noting that it is less than half of what traditional payday lenders charge, which includes "hidden costs" such as late penalties and renewal fees. Moreover, he said, U.S. Bancorp offers the service to all direct-deposit customers, regardless of their credit histories.

Nevertheless, the direct-deposit loans are very lucrative for the banks, experts say. U.S. Bancorp and Wells Fargo earn an annual interest rate of about 120 percent on each loan. Plus there is little risk to the banks because they automatically deduct the money from the consumer's direct-deposit account, said Bart Narter, a banking analyst with Celent, a management and consulting firm in Boston.

"I think they will make a bundle out of it," Narter said.

Neither U.S. Bancorp nor Wells Fargo will disclose specific numbers related to the programs, calling such data proprietary.

Bank officials say the loans, dubbed direct-deposit advances, are strictly meant for emergency needs, such as car repairs or medical expenses.

The service is "a quick and simple solution to people who have no immediate access to other forms of credit," Spurgeon said.

Cash-strapped consumers can also use the loans to prevent overdraft fees from bounced checks, he said.

"Payday loans carry certain (negative) connotations," Spurgeon said. "We serve the same needs, but the products are different."

For one thing, U.S. Bancorp, which rolled out the product about a year ago, is very clear about the terms and conditions of the loans, he said. A consumer can obtain advances for nine consecutive months (or about 18 paychecks) before U.S. Bancorp freezes their access for three months. After that, the consumer can resume taking out loans. Spurgeon, however, said customers who are cut off make up only a small percentage of borrowers.

Wells Fargo reduces the amount of money customers can borrow if they use the service for 12 or more consecutive statement periods.

U.S. Bancorp also sends out letters that remind customers that the service is not a long-term source of funding. The letters also suggest credit counseling and other products such as home equity loans, credit cards and overdraft protection.

But critics of payday loans are not impressed. Even though direct-deposit advances offer lower interest rates than traditional payday lenders, the loans can still trap consumers in a continuing cycle of debt, said Susan Lupton, a senior policy associate with the Center for Responsible Lending, a nonprofit group based in North Carolina.

"I definitely think it's a payday loan," Lupton said. "It's less expensive, but not enough to be a meaningful alternative."

The banks don't offer a way for consumers to repay their loans without tapping their next paycheck, Lupton said, adding that she thinks borrowers should be given more flexibility in their repayment options. She said U.S. Bancorp's three-month "cooling-off" period also means consumers who are cut off from the loans will likely pay overdraft charges on bounced checks.

It's not difficult to see why mainstream banks are squeamish about the term payday loan. Regulators and activists say payday lenders prey upon lower-income Americans, often minority members, by charging exorbitant fees and interest rates. Payday lenders pocket $4.2 billion in fees a year, mostly from repeat users who take out such loans at least five times a year, according to a 2006 study by the Center for Responsible Lending. The average payday borrower pays back $793 for a $325 loan, the report says.

Experts say there is a real need for some consumers to obtain small, affordable loans. The Federal Deposit Insurance Corp., a federal agency that regulates banks, recently issued guidelines encouraging financial institutions to offer alternatives to high-cost payday loans and overdraft programs.

"Loans in small dollar amounts are in strong demand," the FDIC guidelines say. "Providing more reasonably priced small-dollar loans to existing customers can help banks retain these customers and avoid the reputation risk associated with high-cost products."

In 2001, the North Carolina State Employees' Credit Union debuted a payday loan program with a 12 percent annual interest rate. Moreover, the credit union required customers place 5 percent of the loan amount in savings accounts.

Fishback Financial Corp., of South Dakota, which operates First Bank & Trust in Pipestone, Minn., this month introduced Revel Advance. The program allows consumers to borrow small amounts of money on a prepaid card with fees ranging from 8 to 10 percent, plus a monthly maintenance fee of $4.95 to $9.95 if there is a balance on the card. The company charges no interest.

If U.S. Bancorp didn't offer direct-deposit advances, then many of its customers would probably go to payday lenders, Spurgeon said. He said, however, that U.S. Bancorp doesn't consider payday lenders as direct competitors.

"It makes (customers) more comfortable banking with U.S. Bank," he said. "They didn't believe these needs could be met. It makes (mainstream) banks more attractive to people."

New rules for the payday loan industry

Nov 21, 2006 04:53 PM PST




The payday loan industry is under new scrutiny. Recent federal legislation capped interest rates to protect those serving in the military.

Are you using pay day loans to help make ends meet? A new education campaign warns consumers that short term high interest loans may not be what they seem and that new, year long loans are turning into a life sentence of repayment for consumers.

"We tend to hear about payday loans when people have dug themselves into a hole," says Susan Robinson of Nellis Airman and Family Readiness Center.

The Readiness Center at Nellis has been counseling airmen and their families for years. Robinson says financial problems have always been the top issue and echoing a recent Pentagon report that prompted federal legislation. Robinson says that misuse of payday loans can have a direct effect on our military.

"It can keep them from being deployable, it can impact their security clearances. There are just all sorts of ramifications to getting into serious financial trouble."

The campaign warns enlisted as well as civilian consumers that using short-term, high interest loans as a last ditch effort could get you into deeper financial trouble. Their message to payday loan customers: there is another way out.

"There are so many alternatives that we don't think people are exploring just because these locations are so handy and they're right there and they make it seem so simple and people don't realize that it's not simple at all," said Senior Deputy Attorney General Kathleen Delaney.

Before you borrow, consider adjusting the amount withheld for taxes. You're not getting interest on that extra money Uncle Sam takes, and you can put it to better use paying your bills.

Ask your employer for an advance on your next paycheck. But don't forget that the following check will be less. Also, you can apply for programs that our local government and utilities offer, like Nevada Power's Energy Assistance Programs.

If you signup for a payday loan, review the terms carefully. To skirt around the protective legislation, some lenders are changing the rules, lengthening the terms of the loan, but keeping the high rates, so you'll pay even more.

And just because a lender says he or she doesn't sell payday loans doesn't mean you can't get in trouble. Even if you think you have bad credit, you should comparison shop. This is especially true with short term loans. It could save you thousands of dollars by the end of the loan.

Where consumers can complain: Any consumer who suspects he or she may have been the victim of an illegal payday lending operations should contact the Financial Institutions Division at &702)486-4120. Additional information is also available on their website at www.fid.state.nv.us.

Any consumer that wishes to seek debt counseling should contact Consumer Credit Counseling Service at (702) 364-0344 or toll free at (800) 451-4505. Additional information is also available on their website at www.cccnevada.org.

Any consumer that has a question about his or her personal legal rights may contract Clark County Legal Services at (702) 386-1070 or toll-free at (800) 522-1070. Additional information is also available on their website at www.clarkcountylegal.com.

General questions regarding these or other consumer issues may be directed to either the Consumer Affairs Division of the Nevada Department of Business and Industry or the Office of the Attorney General's Bureau of Consumer Protection. NCAD may be reached by calling (702) 486-7355 or visit their website at www.fyiconsumer.org. The BCP may be reached by calling (702) 486-3194 or you may visit the Attorney General's website at http://ag.state.nv.us.