Global IssuesU.S.: Sky's the Limit for Bank Fees
Banks bailed out with U.S. taxpayer money, like Wells Fargo and U.S. Bancorp, are raking in money by charging 150 percent interest and more on short-term, payday loans to people with no savings, consumer advocates say.
'I think this is outrageous. These banks got billions in bailout funds and now it's business as usual,' Jim Campen, executive director of Americans for Fairness in Lending, told IPS.
Once the sole domain of freestanding, paycheque-cashing storefronts, payday loans are proven to send borrowers deeper into debt, while making massive profits for the lender, according to the National Consumer Law Centre.
The Federal Deposit Insurance Corporation changed a rule in 2005 to allow banks to enter the lucrative market of payday lending. In 2008, the FDIC issued guidelines for bank payday loans, with a suggested cap of 36 percent interest.
Wells Fargo, U.S. Bancorp and other banks have chosen not to follow the voluntary guidelines and instead are charging triple-digit interest on payday loans to cash-strapped customers, according to consumer organisations.
Low-income families with little savings are especially vulnerable to these usury fees, says Chi Chi Wu, staff attorney with the National Consumer Law Centre, one of a number of organisations in support of a nationwide cap on interest rates.
'The essential problem with triple-digit [interest] is it can dig borrowers into a hole,' Wu told IPS.
The 700-billion-dollar Troubled Asset Relief Programme (TARP) for banks was created in October 2008, after former Treasury Secretary Henry Paulson said the U.S. needed to hand over the funds to banks to avoid certain collapse of the entire financial system.
Since then, the U.S. has given 441 billion dollars in TARP funds to banks, plus an additional two trillion dollars to banks, auto companies, insurers and financial firms through other Treasury programmes, according to a report by the TARP Special Inspector General.
The Special Inspector General found that the banks were using the bailout funds for purposes other than to make loans, which was the intent of the programme.
Many of the big banks have already paid back their bailout funds, and some report hefty profits.
Wells Fargo, which received 25 billion dollars in TARP funds, made close to three billion dollars in profits between January and June 2009. It has not yet paid back its TARP loan.
At Wells Fargo, the loans are offered to people who have their paycheques automatically deposited at the bank. The bank provides advances on the paycheques, often to people faced with unforeseen bills, like healthcare.
The Wells Fargo Direct Deposit Advance Service lets people borrow half of their monthly income or a maximum of 500 dollars, for two dollars for every 20 dollars borrowed, which equals 120 percent Annual Percentage Rate (APR) interest.
'It is designed to help customers get through an emergency situation - medical emergencies, a car repair, emergency travel expenses - by providing short term credit quickly,' Richele J. Messick, a spokesperson for Wells Fargo, told IPS in an email.
The advance and the fee must be paid out of the next paycheque, Messick said.
'Wells Fargo encourages all our customers to properly manage their accounts. However, emergencies do arise, and our Direct Deposit Advance Service can help customers when they are in a financial bind,' Messick said.
U.S. Bancorp customers who have direct deposit are offered payday advances of 20 to 500 dollars at 120 percent APR that can be taken out instantly online or through an ATM.
Customers who direct deposit as little as 100 dollars per month are eligible for these loans without approval, according to U.S. Bancorp, the eighth largest bank in the U.S.
Like Wells Fargo, U.S. Bancorp gets first access to a customer's paycheque, before any other withdrawals or bill collectors.
U.S Bancorp received 6.6 billion dollars in TARP funds, and earned 529 million dollars in the first three months of the year, and 221 million dollars this spring, the bank says. It recently paid back its TARP funds.
The bank did not respond to requests for an interview.
Fifteen states outlaw loans that charge more than 17 to 36 percent interest, but the banks have found a loophole and they offer the triple-digit loans in all states.
Two bills in Congress would place a national cap on interest rates for consumer loans and auto loans. Sen. Bernie Sanders' legislation would cap interest rates at 15 percent, and Sen. Dick Durbin is proposing a 36 percent cap.
'We think [federal regulators] should crack down on this. We think what Wells Fargo and U.S. Bancorp is doing is not good,' Kathy Day, a spokesperson for the Centre for Responsible Lending, told IPS.
'The way they disclose the interest and calculate it is a severe underestimate of the cost of the loan. If you borrow at the end of the month, the interest is four times that rate,' Campen said.
The Fifth Third Bank, in Ohio, Kinecta Federal Credit Union, in California and Nevada Federal Credit Union also offer triple-digit payday loans, according to the National Consumer Law Centre.
MetaBank, an internet bank based in South Dakota, provides a line of credit, called iAdvance, for 150 percent APR that is linked to customers' bank accounts. The loans do not have to be paid back within the month.
'Unexpected expenses pop up at the worse time. The iAdvance line of credit from MetaBank provides security and peace of mind when life doesn't go according to plan,' the company's literature says.
People who agree to direct deposit their paycheques with MetaBank and hold one of MetaBank's many prepaid cards, offered through partner banks, are eligible to apply for the credit line, according to MetaBank.
Prepaid cards look like credit cards but no credit is involved. The money is placed on the card by the person who owns it, who can then use it instead of cash, for 9.95 dollars per month and two dollars per ATM withdrawal. MetaBank has 50 million prepaid card customers, it says.
MetaBank's literature makes clear that the line of credit and prepaid cards are aimed at people with poor credit or no credit.
'iAdvance also reports to credit bureaus, so you have the opportunity to improve your credit,' the company says.
Customers can take out the iAdvance loans repeatedly, and can 'use the service' for 12 consecutive months. If an iAdvance loan is not completely paid off by the next payday, the company garners future paycheques until the loan is paid off, company literature explains.
Though the iAdvance loans begin at 150 percent interest, they can climb to 650 percent if they are not paid within 30 days, says the National Consumer Law Centre.
'These loans are for people living from paycheque to paycheque. There is a whole industry that preys upon financially vulnerable people,' Day said.
© Inter Press Service (2009) — All Rights ReservedOriginal source: Inter Press Service