Consumer advocates call them "debt" traps. The banks that offer them call them direct-deposit advances and describe them as available funds for short-term emergencies.
But the cash advances have many of the negative characteristics of payday loans. And on Thursday, U.S. bank regulators took a step toward protecting consumers from the risks they pose. The regulators proposed standards for "deposit-advance products."
Annette Smith, 69, lives in Rocklin, Calif., and knows firsthand how risky direct-deposit advances are. She got one in December 2007 from her local Wells Fargo bank. She had intended to get a small loan to repair her truck.
"And so I asked in the lobby, you know, my banker, 'Could I possibly make a small loan.' And he said, 'We don't make any loans below $5,000,' " Smith says.
But he told her she could get a $500 advance that will be automatically paid off when her next direct-deposit came in. So Smith says she went home, got on the bank's website, clicked around and automatically had $500 in her account.
The loan had to be paid back in full when her next Social Security check was deposited. So, on the third of the month, when her Social Security check came in for a little over $1,200, the bank took back the $500, plus a $50 fee. That left her with just $700 to pay her rent, her phone and food bills. She just couldn't make it stretch.
"You just don't make it through. And so you have to borrow again, and again and again," Smith says.
Andrea Luquetta, a consumer advocate, says Smith has taken a new $500 advance almost every month since December 2007.
"And in that time, Wells [Fargo] has given her 62 direct-deposit advances and made $2,952.50 in fees, just by transferring to her $500 one day, taking it out of her Social Security check when it comes, and then giving it back to her because she can't afford to make ends meet in the next month," Luquetta explains.
Luquetta works with the California Reinvestment Coalition, which promotes equitable access to financial services for low- and moderate-income people.
Wells Fargo declined to comment on Annette Smith's situation or on the standards for direct-deposit loans proposed by the Federal Deposit Insurance Corp. and the Office of Comptroller of the Currency.
"We have significant concerns regarding the misuse of deposit-advance products," Comptroller of the Currency Thomas Curry said in a statement issued along with the proposed standards.
Among other things, the standards would require banks to directly assess customers' ability to repay the loan before offering them direct-deposit advances. They also would require banks to disclose the cost of the loan as an annual percent rate. They typically run around 300 percent.
A Promising Proposal?
Regulators also propose to end consecutive monthly loans. Luquetta says she likes the changes the regulators are advocating.
"As a proposal it's very promising," she says.
Public comment on the proposals will be accepted for 30 days.
Only six big banks currently offer direct-deposit loans. They include Wells Fargo, U.S. Bancorp and Fifth Third Bank. None of them made officials available for interviews Thursday. But U.S. Bancorp issued a statement saying its product had safeguards and that 96 percent of the customers who used its product were satisfied with it.