Hearing Focuses on Direct Deposit Advances, Are They Different Than Payday Loans?

Earlier this week, the Senate Select Committee on Aging focused on direct deposit loans that are made by six banks in the U.S.  Both Wells Fargo and US Bank offer these loans in California.  The hearing was titled “Payday Loans: Short-term Solution or Long-term Problem?” To watch it online, visit the Committee’s website. 

Annette Smith, a 69-year old senior from Rocklin, California testified about her experience with Wells Fargo Direct Deposit advance loans, and the nearly $3,000 in fees she paid for the loans over a five-year period.

Direct Deposit Loan Hearing

ABC News (Congress Shines Spotlight on the Hazards of Payday Loans) reported that Smith asked the committee: “Please do something, whatever you can, to stop banks from doing this to other seniors across the country.” You can read her full testimony here.

Not surprisingly, the witnesses representing banks who make direct deposit advance loans and the payday lenders both appeared to be on the defensive throughout the hearing.  The witness testifying on behalf of the payday lenders suggested that the industry needs to do better underwriting to make sure people don’t caught in cycles, provide installment loans that are truly installment loans (for people who can’t pay back their loans in two weeks), register ALL companies making these loans- storefront or online, and create a code of business practices.

Senator Collins (R-ME) remarked that the conciliatory tone seemed far different than the comments the lobbyists had submitted on a proposal by the FDIC and OCC to re-vamp laws on the direct deposit loans.  CRC, along with 62 other community groups, wrote a letter to regulators suggesting that regulations around the loans needed to be strengthened to better protect customers, including conducting actual underwriting for the loan, increasing transparency about the cost of the loan (by representing the cost as an APR instead of as fees) and ensuring that people didn’t get caught in cycles of debt.  You can read the policy recommendations here.

Direct Deposit Loans

Another witness struggled to explain the difference between a payday loan and a direct deposit advance to Senator Elizabeth Warren (D-MA).

Direct Deposit Loans

Upon questioning by Senator Donnelly (D-IN), the bank lobbyists also struggled to explain why charging 200% interest is an acceptable practice, and instead kept trying to represent the cost of the loan as fees, instead of interest.

The CreditUnionTimes (Seniors Fastest-Growing Segment of Payday Borrowers, Senate Told) highlighted Rebecca Bornè’s testimony about research the Center for Responsible Lending has conducted on these loans, finding that in Florida and California, approximately one in five payday borrowers is aged 55 or older, and that on average, payday lenders take 33% of a borrower’s next Social Security check to repay a loan.

According to Propublica’s account (Senator Presses Consumer Bureau on Installment Lender World Finance), Senator Ron Wyden (D-OR) pressed the Consumer Financial Protection Bureau to do more to investigate companies like World Finance. Propublica focused on this company in an earlier article in May: “The 182 Percent Loan: How Installment Lenders Put Borrowers in a World of Hurt.”

Direct Deposit Loans

Senator Bill Nelson (D-FL), the Chair of the Committee, highlighted the relatively low risk involved in making these loans when the customer’s income is from Social Security. Senator Nelson remarked, “As long as there’s a Social Security Administration, that money will be coming in.”

A report earlier this spring by the Center for Responsible Lending (Triple-Digit Danger: Bank Payday Lending Persists) found that 25% of customers of direct deposit advance loans are Social Security recipients).

When a bank lobbyist said that “We don’t want unhappy customers,” Nelson replied “Right now you’ve got unhappy customers and unhappy senators who represent those customers.”

To learn more about payday lending in California, New York, North Carolina, and Illinois, read the recently released report “The Case for Banning Payday Lending: Snapshots from Four Key States” that was written by the California Reinvestment Coalition, the New Economy Project, the Woodstock Institute, and Reinvestment partners. 

4 thoughts on “Hearing Focuses on Direct Deposit Advances, Are They Different Than Payday Loans?

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  2. Pingback: California Reinvestment Coalition | Payday Lending Scandals: What’s ahead for 2014?

  3. Pingback: California Reinvestment Coalition | Payday Lending Industry: What’s ahead for 2014?

  4. Pingback: California Reinvestment Coalition | How much did banks like Wells Fargo and US Bank make off of deposit advance loans?

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