Banks criticized for moving into payday loans

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Traditionally, banks and credit unions have looked down with disdain at payday lenders, considering them little more than shady operators preying on the unbanked.

But in this era of severe revenue deprivation, the business model started looking a lot better. In the wake of the Durbin Amendment and the financial crisis, mainstream banks entered this market with products that they sought to differentiate. They certainly do not use the term payday loans, preferring direct-deposit loans or advance loan. Other more marketable names include "Early Access" or "Ready Advance." But the idea is the same -- they charge fat fees for relatively small loans. If you work the fees out in terms of net interest, you end up in the realm of usury.

JPMorgan Chase (NYSE:JPM) was hit hard for its willingness to aid payday lenders by allowing them to withdraw payments from accounts directly and to charge fees when the withdrawals left accounts overdrawn. It recently announced it would reform its policies. Bank of America (NYSE:BAC) and other banks may be forced to follow suit.

For some perspective on this issue, consider the recent report from the Center for Responsible Lending, which said some of the interest rates amount to 300 percent on an annualized basis.

The Washington Post notes that,  "Critics say the structure of advance-deposit loans promotes a cycle of debt. Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, triggering overdraft fees and additional interest."

Banks that offer such loans include Wells Fargo, U.S. Bancorp, Regions Bank, Fifth Third Bank, Guaranty Bank and Bank of Oklahoma. In the end, banks will have to work hard to satisfy regulators and portray the product as benign and even as a helpful service for people in a bind. The problem is that as payday lenders step up their lobbying activity, the banks could get lumped in with them, which isn't necessarily ideal. They need to distinguish themselves in readily identifiable ways, which might not be simple.

Of course, the CFPB and other regulators are already taking a look. 

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