Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 6, 2012

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Two U.S. agencies are scrutinizing payday loan-like products being offered by major banks. Currently, the Federal Deposit Insurance Corporation (FDIC) and the recently created Consumer Financial Protection Bureau (CFPB) are reviewing the payday loans.

FDIC Chairman Martin Gruenberg responded to a request for the bank investigations and said he would make it a priority to investigate these banks.

Even individuals are stepping forward. North Carolina’s state attorney general, Roy Cooper, is researching if the products deceive consumers into taking out potentially illegal loans. In September, Cooper condemned Regions Bank for advertising the products in his home state. He forced the bank to reveal details of the loan in order to investigate if it is breaking state anti-payday-lending laws.  

Some banks remain solid in their determination to keep the payday loans. Jeffrey Lee, Regions’ executive vice president, responded to Cooper’s investigations in a letter to state officials. He said the loans “create a credit record that will enable [borrowers] to graduate to more mainstream credit products, whether with us or with another reputable institution.”

In Lee’s opinion, the loan options have been received positively by their customers.

The payday-like loans have been added to a few banks across the country, including Wells Fargo, U.S. Bancorp and Regions Financial. A majority of them started in the past three years, since a 2010 Federal Reserve ruling limited debit-card swipe fees among other items. In order to maintain similar levels of revenue, banks expanded their loan options. The banks are now marketing towards a different kind of customer than they normally would serve: one that needs cash quickly and is willing to accept a high interest rate.

In the original format of payday loans, a borrower would apply in-store for a loan. In order to access the money, borrowers were required to provide a check postdated for their next payday. Newer online versions require banking information in order to have direct debiting. The new “banking loans,” which are referred to by a variety of names, such as Wells Fargo’s “Direct Deposit Advance,” state they offer lower interest rates than traditional payday loans. The banks still access the money in similar, direct repayment forms.

The CFPB reports that payday loans carry annual rates as high as 521 percent. According to the Center for Responsible Lending in North Carolina, payday loan customers pay, on average, 365 percent in annual interest rates. Annually, the average customer gets 16 loans and spends over six months in debt. The borrowers find it difficult to repay the initial loan, plus the added cost of fees and interest.

Reports of misuse are even moving towards the federal court system. In August, two customers sued Fifth Third Bank stating that their loans violated both state and federal interest rate laws and deceived customers about the true cost of the payday loans. The lawsuit stated the cost of the loans is “particularly unwarranted.”