Federal regulators have launched an investigation into big banks that are moonlighting as payday lenders, Catherine New of the Huffington Post reports.Banks may not call the short-term credits payday loans (they refer to them as “direct-deposit loans”), but they’re just as fee-ridden as the payday fare typically found at check cashiers and other storefront lenders.
Direct-deposit advance loans “operate and function just like payday loans,” Diane Standaert, an attorney with the centre for Responsible Lending, told Bankrate.com. “They have the same devastating impact.”
The investigation was spearheaded by the Federal Deposit Insurance Commission in response to a petition signed by hundreds consumer activist organisations calling for more regulation of the practice:
Per the petition, here’s what has them up in arms:
- Bank payday loans typically carry an annual percentage rate (APR) of 365 per cent based on the typical loan term of 10 days;
- On average, bank payday borrowers are in debt for 175 days per year;
- Many borrowers take out 10, 20, or even 30 or more bank payday loans in a year;
- Many bank payday borrowers are Social Security recipients, and the banks take significant portions of their monthly checks immediately for repayment of bank payday loans.
What’s more, if borrowers aren’t able to pay back loans within 35 days, banks will deduct the amount owed directly from the borrowers account – whether they’ve got the cash or not.
That’s part of the reason it’s so common for borrowers to take out another payday loan to pay off their existing payday loan debt, creating a sinkhole it’s difficult to claw their way out of.
The FDIC’s investigation will fall in line with the Consumer Financial Protection Bureaus’ efforts to crack down on predatory nonbank payday lenders.