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Should the Government Ban Banks’ Payday Loans?

This article was written by in Banking, Debt Reduction. 14 comments.


When we think of predatory lending practices, the first thought that often comes to mind is the payday loan industry, catering to people barely, if at all, living paycheck to paycheck. Payday loans service communities with an aversion or without a need for or trust of the mainstream financial industry. Offering short-term loans designed to help people survive until the next paycheck arrives, payday lenders charge fees, $16 per $100 borrowed on average, that would be considered usurious if measured by annual percentage rate standards.

Eager not to let non-banking lenders take all the best opportunities for profiting off families struggling the most, mainstream banks are in the payday loan business as well. They don’t call them “payday loans,” though. The name has a negative connotation. Instead, they use names like Wells Fargo’s Direct Deposit Advance, and tout their lower fees. The average fee for a mainstream payday loan is $10 per $100 borrowed, and the average duration of the loan is 10 days; the result is an annual percentage rate equivalent of 365%.

Despite the slightly lower fees, these products are likely more profitable for banks than payday loans are for independent lenders. With the bank-based products, borrowers are required to have direct deposit service enabled on their checking accounts. When the loan is due, the bank takes the money, including fees, out of the account without a separate authorization from the customer.

According to a recent study, borrowers tend to find themselves trapped in a payday loan cycle, continuing to borrow money to aid cash flow until yet another paycheck arrives after using the prior paycheck to pay off the previous loan. Banking customers end up owing money to the bank for an average of 175 days each year, slightly better than the average days in debt for a customer of an independent payday loan service, who owes money for an average of 212 days in the year.

One important distinction between payday loans and the equivalent products offered by banks is that the banks can report your credit profile to the reporting bureaus, Equifax, Experian, and TransUnion. There is no outcome where this is a significant advantage for the customer, though. Even if the borrower pays back the loan in full and on time, having this type of loan on your credit report could lower your score. A pattern of payday loans, paid back, can look worse on your report. The situation can only get worse from there, with patterns of late payment or non-payment drastically reducing creditworthiness.

According to the Consumer Financial Protection Bureau, which has made studying payday loans a priority, 19 million households in the United States use payday loans. That’s a huge, profitable market that banks want to tap, and customers seem to be willing to pay the price.

Have you ever borrowed money from your bank using a direct deposit advance loan or other payday-like loan product? Should these products be banned? Better regulated? I’ve often considered financial products to be like tools. For example, a credit card is like a hammer; it can be used to build when used properly or to destroy. Is the same true of payday loans and similar products?

Photo: bigburpsx3
CNN Money

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More Fees for Bank of America Customers

This article was written by in Banking. 9 comments.

Just when you thought it was safe, Bank of America and other large, national banks, are still finding ways to charge customers new fees. Only a few months ago, word of a new $5 monthly fee for debit card users sent Bank of America customers into a frenzy, threatening to move money away from the financial giant. Bank Transfer Day was largely a success, despite the complicated process of switching banks in today’s automated banking environment.

Hundreds of thousands of customers enrolled in credit unions, smaller organizations that are generally more consumer- and community-friendly than national institutions. Fees like Bank of America’s $5 debit card fee hit mainstream news outlets, bringing personal finance into the consciousness of the public once again. Bank of America eventually dropped its proposal for the new fee, but the bank didn’t stop looking for more methods of extracting funds out of its customers.

Bank of AmericaFor the last generation, customers have grown accustomed to free or mostly-free checking and savings. These are considered deposit accounts. Depositing your money with a bank is more beneficial for the bank than for the customer. Doing business with a bank does the company a favor. The institutions should be paying customers for the banks’ benefit of holding the customers’ money. Sometimes banks do pay consumers, through interest on savings accounts, which as most people know have been at pathetic rates for the last few years.

With money on deposit, banks can go out and offer loans to businesses and individuals, earning money on the interest charged on those loans. That’s where banks should make money from their customers. Savings and checking customers are doing banks a favor.

Lately, the problem has been that banks aren’t making as much money from lending as they had previously, and shareholders demand consistently growing profits. That pressure results in even more fees. And banks are now counting on the fact that last year’s outrage has subsided, and the public is now willing to live with the idea that basic banking is not free. Additionally, it’s fair to say that the cost for a bank to manage checking and savings accounts may have increased, due to research and development into technology to provide all the banking conveniences (online access, mobile apps, person-to-person payments, etc.) that consumers have come to expect, although one could argue the lowered reliance on tellers and live customer services representatives should offset that cost.

Furthermore, the latest round of fees are designed to hurt lower income households more than those with higher net worth amounts. It’s been true in investing for a while that the better rates and lower fees are available to those with higher balances. This is due to the attempt to convince customers to invest as much money as possible with any one particular institution or brokerage. The same is true with fees; the more money you have, the more leverage you have to demand lower costs for the services you buy.

This leaves low-income families in a tough spot. If you can’t maintain a minimum balance in your checking account, a monthly fee will reduce that low balance even further, possibly even below zero, so you end up owing money to the bank or the bank decides to close your account. While the balance minimums encourage customers to leave more of their money with one institution, not all customers have more money to deposit.

Here are a few recent examples of how the latest round of new fees from big banks penalize those without the means to deposit more.

  • Some Wells Fargo customers have been subject to a new $15 monthly fee if unable to maintain a $7,500 balance. And they’ve recently changed policies to prevent customers from suing the bank or being part of a class-action lawsuit.
  • Citibank increased its minimum balance to avoid a $20 monthly fee from $6,000 to $15,000.
  • Bank of America is testing new monthly fees of $6 to $25 in three states (Arizona, Georgia and Massachusetts).

At the same time, an informal poll of fans of Consumerism Commentary on Facebook and followers on Twitter indicates most engaged Consumerism Commentary readers, who generally earn more than the average internet user according to basic demographic research, pay nothing for their checking account, though some are still subject to a minimum balance or enrolling in direct deposit to avoid a fee. Finding free checking is still possible, especially with credit unions, but non-students still need to occasionally jump through hoops with major banks.

New regulations are often cited by the financial industry as the trigger for punishing low-income customers for handing their money to banks for safekeeping and lending. Others see these new fees as a way for banks to increase profits while using regulation as a convenient scapegoat. Of course, opinions on the matter are generally divided along political party lines as well as between industry lobbyists and consumer advocacy groups.

Low-income families might continue to avoid the banking industry, which may be the unstated goal of financial institutions in the first place. Unfortunately, that leaves little choice for low socio-economic status communities other than turning to non-bank financial products, like expensive payday loans and check cashing services. Not only do these communities need better financial role models (education alone will never solve the financial literacy problem), but they need to be guided toward better products and services.

There’s a real market opportunity for better products and services, for smart entrepreneurs who are looking to make a difference. In the mean time, here’s how to close your Bank of America savings or checking account when walking into the branch won’t work for you.

Photo: MoneyBlogNewz
KVAL / AP

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Bank Switch Kit and Checklist

This article was written by in Banking, Featured. 9 comments.

With Wells Fargo changing their policies to be less consumer-oriented this week, I’ve received several questions about the logistics switching banks. In previous decades, closing your account at one bank and opening an account at another was a simple process. All that was required was to walk into one branch, ask to close your account, provide some proof of your identity, take your cash or cashier’s check to a different location, and open a new account with your deposit.

With automated banking, direct deposits, and pre-authorized electronic withdrawals and online bill payments, taking your business from one bank to another can be a hassle. There is a financial risk involved; if you neglect to change your banking information with a vendor, your payment could bounce, and you could be subject to late fees, insufficient fund fees, and perhaps even cancellation of your services.

Broken piggy bankIf you’ve taken a modern approach to banking, with automated and electronic payments, you’ll need to start planning in advance. Here are the priorities, if you’ve already chosen your new bank. To compare banks, read through the reviews available here on Consumerism Commentary, but also consider your local community banks and credit unions.

Download the Consumerism Commentary Bank Switch Kit to help you organize the information you’ll need. The link is at the bottom of this article.

Step 1. Open the new account with appropriate minimums.

Before you can change the account information stored with companies that bill you, you’ll need to have your new bank’s routing (ABA) number and your new account number. For a short period of time, both your old bank account and your new bank account will be active. This ensures that all your payments go through and all your deposits are received during the transition period. Determine which types of accounts you need at your new bank, and have the minimum required to open the accounts ready to deposit.

If you had debit cards, ATM cards, check cards, deposit slips, or paper checks with your old account, don’t forget to order the same when you open your new account.

Download the Bank Switch Kit for a convenient way to keep track of your new banking information.

Step 2. Change your direct deposit information.

It could take as many as two pay periods for your new direct deposit instructions to take effect. It could take two to four weeks after requesting the change to your direct deposit before you receive a pay check at your new bank. Most employers have their own forms for submitting changes to direct deposit, but I’ve included a generic form in the Bank Switch Kit that most human resources should be able to accept. Many employers have the ability to accept direct deposit instructions online, so check with your employer as soon as possible.

This is the slowest aspect of moving from one bank to another, so start as soon as you’ve opened your new accounts.

Step 3. Adjust your automated bill payments.

If you’re living in the twenty-first century, you’ve likely configured many of your monthly financial obligations to withdraw money from your bank accounts. You’ll need to change this banking information one vendor at a time without missing any possible automated withdrawals. Review your past three or four banking statements to help your recollection of all the bills that are paid automatically. Here’s a list of some of the most common bills that allow automated payments from your bank accounts.

  • Your rent or mortgage.
  • Your power bills (electricity or gas).
  • Your telephone bills (land line and mobile phone).
  • Your water and sewer bills.
  • Your property taxes.
  • Your income taxes, if you have enrolled in the Electronic Federal Tax Payment System (EFTPS) or your state’s electronic payment system.
  • Your car, home, and life insurance.
  • Your other insurance payments.
  • Your credit card bills.
  • Your payments to student loans.
  • Your payments to car loans.

The downloadable bank switch kit has a checklist where you can indicate the date you called to have your banking information changed. When you call, email, or complete this change online, make sure you know when the changes will take effect. Most of the time, the change is immediate, but if you have a payment already pending using your old bank account’s information, it might not be until the following month that the vendor applies the new banking information.

If you’ve opened your new bank account with just the minimum required to avoid fees, keep in mind that you may need to transfer more money from your to cover your bills.

Step 4. Update any linked bank accounts or investments.

The ability to begin investing using automated bank transfers has helped many people begin to save for retirement — or the future in general — without having a large sum to devote to the investment immediately. It’s easy to forget about these investments and transfers. I have had a weekly $15 transfer from my primary checking account to another bank’s savings account for years, and it would be easy to forget this without reviewing my transactions each month. Updating information regarding your linked accounts serves two purposes:

  • to ensure your accounts don’t try to send money to or withdraw money from the account you intend to close, and
  • to ensure you don’t miss any saving or investment opportunities as you rearrange your bank accounts.

First, as mentioned above, link the new bank account to your old bank account to ensure you can transfer money to your new account at will. This will ensure you have enough funds in the account to cover all the bills you’ve transitioned in the previous step. Keep in mind that savings accounts are limited to six on-demand withdrawals per month. If you exceed that number, the bank may charge you fees or close your account before you’re ready.

Pay attention to your automated investments to your IRA, transfers to your high-yield savings accounts, and investments to your kids’ education funds. Download the Bank Switch Kit for a complete list of possible linked accounts.

Step 5. Wait and close your old bank account.

After you’ve taken the time to ensure that your old bank account has been inactive and will not expect any new deposits or withdrawals, follow your bank’s process for closing your account. In most cases, you can walk into any branch with proper identification for closing your account, but in some cases, banks require you call a telephone number. If that is the case, they might want you to talk to a “retention specialist” who will do his or her best to keep you from closing your account, perhaps by offering you a better deal than you may be receiving. It’s best to ignore these offers and stick to your resolution.

If you are required to close your account by phone or by mail, the only way you may be able to receive your deposited money is through a check sent to the address your bank has on file for your account. This is an imperfect process; it would be much better to walk into a branch and walk out with your money. It would frighten me if I had to close a bank account with a significant sum of money and wait for a check for the amount to arrive in the mail.

Once you’ve received the check, make sure the bank has provided the full balance. Your balance at the end of the statement or online should be zero. Ensure you’ve received any accrued interest your account would have earned. In some cases, you may need to time the closing of your bank account to ensure you don’t miss on any substantial interest that might be due to you if your bank does not accrue interest on a daily basis.

The Consumerism Commentary Bank Switch Kit available for download includes a generic letter you may send to your bank in order to close your account.

Step 6. Destroy old forms.

Shred any debit cards and deposit slips associated with your old account once you receive confirmation that your old bank has closed your account. Get rid of your paper checks and any endorsement stamps that you may have that include your bank number.

With this step, you can celebrate the moment you are now free from a relationship you are better off without. Don’t forget to monitor your new account and your bills closely over the next few months to ensure you haven’t missed anything. If you find a problem quickly, you may be able to resolve it without needing to pay any penalties (or have penalties reversed if they are charged automatically).

Download the Bank Switch Kit and Checklist Here

Bank Switch Kit and ChecklistDownload the Consumerism Commentary Bank Switch Kit (version 1.0α, February 14, 2012). Adobe Reader or another program that displays and prints Portable Document Format (PDF) files is required.

This is a work in progress. Please feel free to share your feedback. I’ll continue to revise the Kit to improve it for more consumers who wish to leave one bank behind in favor of another financial institution, whether a national, regional, or community bank or a credit union.

Photo: Images_of_Money

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Year-End Personal Balance Sheet, December 2011

This article was written by in Monthly Update. 18 comments.

I’ve spent the last decade of my life focused on my finances. I started because I had no money and a job that was taking more from me than it was providing in income. I knew I had to make some changes if I wanted to build any kind of future for myself. Soon into this journey, I founded this website, where I’ve written about my own financial situation and tracked my balances on a monthly basis.

Over the years, my financial situation has improved. Rather than focusing on and tracking every cent as I was doing in 2003, a necessary step to train myself to save money and value everything I was earning, I now am significantly more relaxed. I still track my bank account balances. Eventually, I stopped tracking every cent I spent with cash. Cash spending became such a small percentage of each month’s income that it became unnecessary for me to enter every receipt (or every remembered transaction for those where no receipt was provided) into Quicken. I have been using credit cards for most expenses. (I was using credit cards to take advantage of rewards, which I didn’t start doing until I was out of debt, spending less than I was earning, and making conscious spending decisions.) The credit cards helped me carefully track my expenses.

My ability to improve my financial condition has been partly due to my public tracking. When my numbers are published online, I have to admit to my mistakes and accept criticism from readers when it’s due. Knowing that I will be reporting the details of my bank accounts helps me to continue making good decisions with my money.

At the end of the year, I take the chance to look at my life from a broader perspective. I now have ten years of history in my Quicken file. I’ll be thirty-six years old in a couple of months, so my finances have been a focus for almost all of my adult life. And for those of you, readers, who know me only through this site, only as “Flexo” or Luke Landes, you may think that an obsession with personal finance rules my life. The good news is that this isn’t true; outside of Consumerism Commentary, when I see my friends and family, personal finance is not usually a topic of discussion.

With ten years of history in Quicken, I can easily see my own financial progress over time. At the end of 2001, the world was still shaking from terrorist attacks in New York and Washington, D.C., and my life was uncertain. With no money, no job, no girlfriend, and no place to live, I knew I needed to make changes in my life. That’s what I did.

Continue reading to see the numbers. Read the full article →

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The Power of Customer Outrage

by Flexo

In what almost seemed like a staged publicity stunt, Verizon Wireless quickly rescinded their plans for a new $2 fee for most bill payment options. An employee leaked an internal memo describing the new fee, and within twenty-four hours, the wireless company both confirmed and then rescinded the fee, citing their policy of listening to ... Continue reading this article…

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Verizon Wireless Plans Then Rescinds $2 Fee for Paying Your Bill

by Flexo
Verizon Wireless

Update: Less than a day after a Verizon Wireless employee leaked a memo with this information, the company has announced that it will not be moving forward with the implementation of this $2 fee. The sad fact is we now live in a world where many companies have left their customers behind in the search ... Continue reading this article…

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Bank of America Class Action Lawsuits – Did You Receive a Check?

by Flexo

Many Consumerism Commentary readers have written in to let me know that they recently received a check for about $98 from Bank of America. This check is not a result of the Bank of America overdraft fee class action lawsuit, but it is the result of a similar lawsuit. First of all, the overdraft lawsuit ... Continue reading this article…

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We Did It: Bank of America Dropping $5 Debit Card Fee Proposal

by Flexo

After Wells Fargo, Chase Bank, SunTrust Bank, and Regions Bank dropped their plans for debit card fees yesterday, the largest bank in the United States, the only bank holding onto its policy of eliminating unprofitable customers by annoying them with inconvenient fees, dropped their own plans to enact a $5 monthly debit card fee in ... Continue reading this article…

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