If you are offered a short-term advance on your paycheck at a triple-digit interest rate, you might think you're being pitched a payday loan — a product that's basically banned in Maryland and other states with rate caps.
But what if that deal came from your bank?
A few banks, including Wells Fargo & Co., offer deposit advance programs that allow customers with direct deposit to borrow against their next paycheck. The bank collects its due when the paycheck is directly deposited in the account a week or so later. It also pockets a fee for making the loan.
The terms of such loans are measured in days. But when calculated as annual interest, the fee would amount to as much as 365 percent, according to a recent survey by the National Consumer Law Center. Not much different, consumer advocates contend, than a payday loan.
"Banks are borrowing at less than 1 percent. They can turn around and lend it at 300 percent," says Uriah King, vice president of state policy with the Center for Responsible Lending. "No wonder we are not having an economic recovery."
Lenders in Maryland don't offer direct deposit advance loans — yet.
But Wells Fargo has offered these loans in Western states since 1994. And the bank is converting Wachovia branches in Maryland to the Wells brand next month.
Spokeswoman Richele Messick says Wells, which acquired Wachovia in 2009, will decide no sooner than early next year whether to bring the product here.
But this is one product that Marylanders can do without.
These loans are likely to appeal most to vulnerable consumers who live paycheck to paycheck but have run short of cash. And once consumers borrow, they often take out back-to-back loans, paying a fee each time.
A recent survey by Center for Responsible Lending found that these borrowers on average remained in debt for nearly six months.
And certainly these loans run counter to the protections that states have established for their consumers.
Maryland for years has capped the interest rate on small loans at an annual rate of 33 percent. But state caps don't apply to federally regulated national banks.
Mark Kaufman, Maryland's commissioner of financial regulation, says he is concerned that these loans could trigger "a cycle of debt that the person never gets out of."
The federal Office of the Comptroller of the Currency recently proposed guidelines for banks making these loans, such as requiring them to disclose the costs and risks to consumers.
The regulator also said banks should set a cap on how much consumers can borrow, as well as how many consecutive loans they can take out before they must take a break from borrowing.
And the OCC says banks should monitor the loans for excessive use.
The American Bankers Association, responding to the guidelines, says banks that offer deposit advances report that customers like the ease and anonymity of such loans. And the ABA notes that other banks are considering adding this product, too.
Wells Fargo's Messick says deposit advance loans are an important service "designed to help consumers in an emergency situation."
She adds that Wells Fargo revised its program this year. The fee was reduced from $2 to $1.50 for every $20 borrowed. And after someone has taken out consecutive loans for six months, Messick says, Wells Fargo now will contact them about a cooling-off period or will gradually reduce the amount they can borrow so they end up having to take a break for at least a month.
She maintains that deposit advances aren't payday loans.She notes that Wells Fargo charges $7.50 to borrow $100, while payday lenders typically charge $17.
But even at the reduced Wells Fargo rate, according to the National Consumer Law Center, customers would pay an annual percentage rate of 274 percent on a 10-day loan of $400.
Consumer advocates want the OCC to ban such high-cost loans, or at least suspend them while their impact on consumers is studied.
The advocates say the guidelines proposed by the OCC lack details and muscle to protect consumers and more banks will feel comfortable adopting these loans to make up for lost income after regulators cracked down on overdraft fees.
"There are bank consultants out promoting these products," says Lauren Saunders, managing attorney for the National Consumer Law Center. "I fear this is going to be the next big bank abuse."