Wells Fargo, Regions Bank, US Bank and other lending institutions have recenty entered the payday loan market through a new banking product called Direct Deposit Advances (DDA). According to professor Alex Mikulich of Loyola University in New Orleans, the banks are offering short-term loans charging interest rates of 365% to bank customers that have paychecks or Social Security benefits directly deposited into their bank account. (Here is the link to professor Mikulich’s article, The Payday Shark in Your Bank Account.)
“DDAs are attractive because banks make them easy to get at a branch an ATM, or over the phone, 24 hours a day, seven days a week. “Ready Advance” is just a click away inside of an online account at Regions. Many borrowers assume they have gotten a low-cost cash advance rather than a loan. Borrowers may think that the 10% fee on $100 is cheaper than other credit (like 18% on a credit card) but $10 for a $100 loan repaid in ten days, which is a typical bank DDA (payday) loan term, is 365% APR.”
If a bank’s customer takes out a DDA loan, the bank pays itself back when the next Social Security check or paycheck is directly deposited into the account. Of course, if there are insufficient funds to repay the loan the customer will incur overdraft fees, thus resulting in additional bank profits. Loans not repaid within 35 days may result in the bank closing the account.
In the short run bank will make an amazing profit on these new products, but at the cost of losing a substantial number of customers in the long run and creating a hostile collection environment with customers. The trend of subprime lending that eventually lead to the mortgage meltdown crisis seems to be resuming at an alarming rate.
One of the first items I address to all new clients is to warn them to change bank accounts if they are contemplating bankruptcy if they owe their bank money. Banks have the right to freeze a bank account and to transfer all the funds in the account to any unpaid loan or line of credit owed to the bank on the date the bankruptcy is filed. For this reason, I strongly urge new clients to keep their deposits (checking and savings accounts) and their loans in separate banks if they are filing bankruptcy. In short, if you owe your bank money, get a new account at a different bank.