ShareThisFor more than a decade, the nation's payday lenders have battled the perception that they operate on the shadowy fringe of the mainstream financial system, outside the reach of government regulators and rules dictating prudent lending.
Now, payday lenders have a powerful new ally in their quest for respectability: big banks.
A few of the nation's largest banks -- U.S. Bancorp, Wells Fargo and Fifth Third Bancorp -- are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.
Despite protests from national consumer groups, which accuse national banks of skirting state laws that limit outrageous interest rates, the banks are in a strong position to steal a big chunk of the $35 billion-a-year payday lending market -- with its estimated $7.3 billion in fees from borrowers, say industry analysts.
Fees on the new bank products may seem punitive, but they are about half of what is charged at traditional payday lending outlets. Increased competition may lower those fees even more, some analysts believe.
"Despite the fact that the rates may appear mind-blowing to some, people need small-dollar loans like this -- especially now," said Richard Bove, a bank analyst at Rochdale Securities.
Throughout the recession, major credit-card issuers have been cutting limits while hiking rates and late-payment fees on riskier customers, which have made the cards less affordable. In some cases, card companies have eliminated lines of credit altogether.
Longer term, the impact of the big banks' entry into the payday lending arena could be far-reaching. Some analysts argue it could finally vault a controversial product into the financial mainstream. It's a major reason why representatives of the payday lending industry are embracing their new bank rivals.
"We think it legitimizes the product and makes it more mainstream," said Lyndsey Medsker, a spokeswoman for the Community Financial Services Association of America, a trade group for payday lenders.
For people struggling to make ends meet, the bank loans may prove a more affordable alternative to traditional payday lending outlets. All three banks charge $10 per $100 borrowed, which translates into a 120 percent annual interest rate if borrowers pay off the loans in a month. Though that may seem steep, it's much lower than storefront payday lenders that charge an average of $17 per $100 borrowed -- an annual rate of about 200 percent.
All three banks declined to disclose financial data on the products, including how many people have signed up for them.
The Consumer Federation of America has accused the banks of using their national bank charters to avoid state usury laws. Usury laws only apply to state-chartered lenders; and U.S. Bancorp, Wells Fargo and Fifth Third all have national charters.
"To me, it seems galling that these institutions that receive so much support from the taxpayer and the U.S. government happen to operate under a weaker consumer protection regime" when it comes to payday lending, said Christopher Peterson, a law professor at the University of Utah and author of "Taming the Sharks," a book on abusive lending practices. "It's a matter of time before regulators catch on to this."
The Office of the Comptroller of the Currency, the federal agency that regulates nationally chartered banks, has already signaled its opposition to banks entering the payday lending arena.
The banks have been careful to distinguish their products, including eschewing the term "payday" as they market them. And they emphasize their differences with payday lenders.
"We inform our customers that this is an expensive form of credit not intended to solve longer-term financial needs," wrote Wells Fargo spokeswoman Peggy Gunn in an e-mailed response to questions. "It is designed to help customers get through an emergency situation -- medical emergencies, a car repair, emergency travel expenses, etc. -- by providing short-term credit quickly."
There are built-in cooling-off periods for borrowers who use the loans repeatedly. And customers can't extend or "roll over" the loans because the amount owed is automatically repaid with the next direct deposit. The banks claim these restrictions make it less likely that borrowers will fall into the same sort of ruinous debt cycle that has been associated with payday lenders.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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