Big Banks Pushing “Shadow” Payday Loans?

May 17th, 2010 by Reed Allmand

A new report was recently released by the Center for Responsible Lending, stating that many mainstream banks are offering short-term, high-interest loans that are basically payday loans in the form of a paycheck advances.  These loans charge $10 per $100 per month and amount to an annual percentage rate of 120 percent or more violating the ban on triple-digit interest rates in 15 states and the District of Columbia.    However, national banks which are regulated by the Office of the Comptroller of the Currency are not required to follow state laws, a fact that is leaving many Americans vulnerable to a new type of payday loan that may be even more dangerous to them financially.

Now that national banks are losing profits on credit cards due to more stringent rules that have prohibited certain behaviors, they are looking for new ways to earn money.  One of the tactics being employed now is a new type of payday loan that allows bank customers with automatic deposit to take out shadow payday loans sans the regulations and the few but important protections offered to payday loan customers.  At least with a payday lender you have certain rights allowing to you stop a payday loan lender from collecting from your bank account.  But what happens when the payday lender is your bank?  How do you stop them from deducting money out of your account when you know you can’t pay? It would probably be very difficult if not impossible to stop the bank from deducting payment for your payday loans.  And because payday loans issued by large banks are extremely short-term (usually a month or less) there is little time for a borrower to respond when a crisis prevents them from repaying the loan.  As we have mentioned before, avoid using payday loans, they are destructive to your financial well-being even when they are issued by a major bank and renamed “paycheck advances.”