How does the Regions “Ready Advance” loan work?
The Regions “Ready Advance” is a small loan of $500 or less, repaid in full out of the borrower’s next direct deposit—typically their next paycheck or Social Security deposit. The loan fee is $10 per $100 borrowed and is repaid in full on average 10 days later.
If the direct deposits are not sufficient to repay the loan within 35 days, Regions takes the funds anyway, even if it overdraws the bank account. This loan is available to Regions customers who have had a checking account for nine months, with regular direct deposits in recent months.
Is this how other payday loans work?
Yes. Other payday loans work in almost exactly the same way—they are small loans due in full on your next payday, usually two weeks later. The loans are secured by a live check or another form of electronic access to your bank account, like an ACH authorization.
What’s wrong with bank payday loans?
Bank payday loans create a debt trap, just like other payday loans. Rather than solving a financial crisis, they sink the borrower into a deeper financial hole. Center for Responsible Lending research shows:
- The average bank payday loan costs 365% annual interest.
- Bank payday customers are in debt an average 175 days of the year, with an average 16 transactions.
- Nearly one-quarter of all bank payday borrowers are Social Security recipients, who are 2.6 times more likely to have used a bank payday loan than bank customers as a whole.
What features made these payday loans abusive?
Storefront and bank payday loans share the same abusive features.
- Short loan term: Center for Responsible Lending research shows that bank payday loans are repaid on average in 10 days, an even shorter loan term than other payday loans, which are typically repaid in about 14 days.
- Very high cost: The Regions payday loan fee is $10 per $100 borrowed. Though this fee is lower than the typical fee for storefront payday loans, the effective cost is equivalent. This effective cost for loans is measured as the annualized percentage rate or APR, and it takes into count how long you borrow the money. Paying $10 per $100 to borrow money for a year is very different than paying $10 per $100 to borrow money for just 10 days. The average bank payday loan carries an annual interest rate of 365%.
- Super lien on the borrower’s bank account: The bank and the payday lender get their money first, even before the borrower gets access to his paycheck, through a live check, an ACH authorization, or the right to take funds out of the next direct deposit.
- Loan flipping leads to debt trap: When the borrower repays his payday loan, he is left with a big hole in his paycheck. Too often, payday borrowers are forced to take another high-cost loan before their next payday, just to keep food on the table and stay current on their other bills.
- No underwriting: The payday lender does not underwrite the loan to determine if the borrower can afford to repay the loan without re-borrowing. Instead, the lender looks to see if the borrower has sufficient direct deposits to repay the loan, even if repaying the loan leaves them without enough money to make it until their next payday.
Are any other banks making these loans in North Carolina?
No. Regions is the only bank making payday loans in North Carolina. Several other national and large regional banks have introduced payday loans, but none offer them in our state at this time.
Is this Regions payday loan worse than other payday loans?
Yes, in some respects. Once borrowers qualify for a the loan (bank account open for 9 months with sufficient direct deposits), the loan is push-marketed every time they bank on-line—a banner ad encourages them to take a “Ready Advance,” when they have simply gone on-line to check their balances or pay bills.
All payday lenders like to mislead their customers by implying that the fee charged per $100 borrowed is the annual interest rate (10%, 15%, etc., not the 350% to 400% APR you are actually paying). The cost of a Regions loan is even more hidden. The only APR Regions discloses, assuming the borrower reads the fine print on the Regions website, is a 21% APR that is an extra charge for repaying in installments.
Finally, because the bank takes its money first, they almost never have to initiate aggressive debt collection actions. As a result, the borrower is likely to think that their real problem is falling behind on other bills and high overdraft fees, not their bank payday loan.
Payday loans are illegal in North Carolina. How can Regions Bank make these loans?
Payday loans have been illegal in North Carolina since 2001 when the NC General Assembly decided not to reauthorize 400% payday lending. This prohibition applies to both storefront and on-line payday lenders, no matter where the lender is located. It also applies to banks that are chartered in North Carolina. Regions Bank, chartered in Alabama, maintains that it can export interest rates from Alabama (where 400% payday lending is legal), into North Carolina and other states where it operates, under what is commonly referred to as “interest rate exportation”.
What can our NC General Assembly do to stop this high cost lending?
The NC General Assembly has already spoken in opposition to payday lending by making it illegal in 2001. They have repeatedly upheld our North Carolina small loan interest rate and fee limits, which regulate loans of $10,000 or less. Interest rates on these loans are capped at 36%. The annualized interest rate (APR), which includes the cost of fees and interest, can go as high as 54% on very small loans.
Who regulates Regions and this payday loan product?
In addition to their Alabama bank regulator, the Federal Reserve and the newly formed Consumer Protection Financial Bureau (CFPB) have the authority to rein in this abusive product. We also expect the North Carolina Attorney General and Commissioner of Banks will be taking a careful look at this product.
For more information, contact Susan Lupton at the Center for Responsible Lending at email@example.com or 919-313-8521