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Checking advance or payday loan?

By Marcie Geffner ·
Monday, August 1, 2011
Posted: 9 am ET

The Center for Responsible Lending has issued a scathing report charging that checking account advance loans offered by some U.S. banks are in no respect different from payday loans offered at nonbank storefronts.

Here's a summary from the July 21 report, "Big Bank Payday Loans":

While payday loans have typically been offered by non-bank payday loan shops in states where it’s permitted, a few mainstream banks, who themselves are enjoying historically low-cost loans from the U.S. taxpayer through the Federal Reserve, have started making payday loans themselves, directly to customers through their checking accounts. They call these products 'checking account advance' loans, but they are structured just like payday shop loans, carrying a very high-cost and requiring full repayment upon the customer’s next paycheck.

The researchers found that checking account advances were "very expensive," carrying an annual percentage rate of 365 percent based on the typical term of 10 days, that the loans often led to a cycle of indebtedness, and that nearly one-quarter of the borrowers were Social Security recipients.

These conclusion were based on a 12-month analysis of 614 consumer checking accounts, 55 of which showed checking account advances. The sample size is small, since as the CRL noted, banks aren't required to disclose any data about these services.

Our findings based on the instances of bank payday loans we identified in this dataset are deeply troubling," the center said in a statement. "We call on regulators to immediately collect and make public data from the banks themselves to learn more about the impact this product has on banks’ customers.

A chart in the report illustrated the difficulty a borrower who earned an annual income of $35,000 would face trying to repay a $200 checking account advance with a $20 fee in one pay period. After accounting for payroll taxes and essential expenditures, defined as housing, food, utilities, transportation and healthcare, the consumer faced a $96 deficit at the end of the pay period.

The CRL concluded: "The bank would, of course, repay itself, but the borrower will be left with insufficient funds to make it to the end of the next pay period without having to take out another payday loan."

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