A new report claims US Bank and Wells Fargo are preying on low-income customers by offering short-term loans with steep fees.
The report by the group Minnesotans for a Fair Economy claims the fees are the same or worse than charges imposed by traditional payday lenders. Minnesotans for a Fair Economy, which includes community, faith and labor groups, has asked Wells Fargo and US Bank to stop offering the loans.
"This product is a debt trap. That's it. It's designed for profit and we see the pain that it offers," said Darryl Dahlheimer, program director at Lutheran Social Service Financial Counseling, who supports the group's efforts to persuade the banks to stop offering the loans.
The loans are offered to customers at US Bank and Wells Fargo who have a bank account in good standing and receive paychecks, Social Security checks, or other income via direct deposit. Customers can request up to $500 in a cash advance without completing an application or meeting with a personal banker. The banks then take the loan amount, plus fees, from the next direct deposit.
The cash advances come with considerable fees. US Bank charges $2 for every $20 borrowed - a 10-percent fee. Wells Fargo charges slightly less — $1.50 for every $20. Customers pay the same fee regardless of whether they pay the loan back in a day or a month. US Bank requires customers to pay back the advance and the fees within 35 days.
For example, a US Bank customer who takes out a $100 cash advance pays $10 in fees. If the customer pays the loan back in 10 days, the fees are the equivalent of a 365 percent annual interest rate, the report said.
Kevin Whelan, spokesperson for Minnesotans for a Fair Economy, said he does not know of any other banks that offer similar loans. Officials at TCF Bank and Bank of America told MPR News they do not offer this type of loan.
Wells Fargo and US Bank declined to provide information about how many customers rely on cash advances and how frequently customers use the advances. A 2011 report by the nonpartisan research and policy group Center for Responsible Lending found that nearly one-quarter of all consumers who use bank payday advances receive Social Security. It also found customers who rely on the loans are in debt for 175 days a year on average. The group compiled the statistics using nationwide checking account data from a private research firm.
US Bank spokesperson Nicole Garrison-Sprenger declined an interview request. In an email, she said the bank's product, known as Checking Account Advance, "is a safety net for customers who have no other way to pay for unexpected expenses such as a medical emergency or an auto repair."
The bank is upfront about the costs, she said, and informs customers of lower-cost options that might be available. It also provides what Garrison-Sprenger called "mandatory 'cooling off' periods" to prevent customers from relying too frequently on the short-term loans.
Some consumer advocates say the limits are not effective. US Bank allows customers to take out cash advances for nine consecutive statement cycles. After that, the bank imposes a 90-day "cooling off period" before allowing customers to begin borrowing again.
Wells Fargo allows customers to receive cash advances for six consecutive statement periods. After that, the bank reduces the amount a customer can borrow by $100 per month until the amount reaches zero.
However, the bank offers an option to get around the restriction, which it notes on its website. "You can avoid this reduction in your standard credit limit if you do not take a new advance for one complete statement period at any time," the website says.
Wells Fargo spokesperson Richele Messick said the bank is transparent about the high fees and intends the loans to be used only in emergencies. She notes that Wells Fargo provides a monthly payment plan for some customers who cannot pay back the advance within 35 days.
"It is an expensive form of credit that is not intended to solve longer-term financial needs," Messick said. "And we have policies in place to help ensure that our customers do not use direct deposit advance as a long-term solution."
Messick said the cash advances differ from traditional payday loans because the bank does not allow customers to roll-over debt from month to month. Customers have to pay back the loan and fees before they can borrow again.
But Dahlheimer, at Lutheran Social Service, said the distinction is irrelevant.
"Talk about splitting legal hairs, my goodness," he said.
Dahlheimer said that for low-income consumers who receive financial counseling at Lutheran Social Service, cash advances are often the first step to a ruinous cycle of debt and bankruptcy. Customers might receive quick cash up front, he said, but when part of their next paycheck or Social Security check is used to pay back that debt, customers will often have trouble paying that month's bills. Customers will then request another cash advance for the next paycheck, he said.
In the long run, when customers have reached the limit for cash advances or cannot pay back the amount owed, they face bounced checks, overdraft fees, and poor credit, he said.
"It's like throwing gasoline on the fire of indebtedness," Dahlheimer said. "People who are fairly desperate, who have poor credit, can't have access to traditional loans, it's like having a product out there like an accelerant, which is what arsonists use, to make the problem much, much worse quicker."
Banks are not subject to state laws that regulate traditional payday lenders, according to Wells Fargo and organizers with Minnesotans for a Fair Economy.
Opponents of the loans have contacted federal regulators to ask for a ban on bank payday loans. Local community groups have also met with US Bank to ask them to stop offering the loans, said Whelan, the Minnesotans for a Fair Economy spokesperson.
"We think that US Bank and Wells Fargo, just because they care about their image in the community and want to do the right thing, should design products with fees that offer short-term credit on fair terms and not these exorbitant and predatory terms," Whelan said.