It's illegal for payday lenders to charge service members or their families more than a 36 percent annual rate — but other companies are finding ways to charge you more.
That includes some mainstream banks. The Center for Responsible Lending, a consumer advocacy organization, is calling for regulators to put an end to what it calls "bank payday loans."
The interest rate on such products works out to 120 percent annual percentage rate if paid back within a month — as is required.
Just a few national banks are offering these expensive advances, but if regulators "don't clamp down on it now, it could be the next overdraft fee," said Leslie Parrish, senior researcher for the Center for Responsible Lending. "As banks are looking to increase revenue, this could be a natural choice."
The center released a report on the loans in February.
This is all the more reason to familiarize yourself with other, far less expensive options for short-term emergency financial assistance — including no-interest loans from military relief societies, designed to be alternatives to payday loans.
The interest-capping payday loan law doesn't apply to these other bank loans because of the Defense Department's narrow interpretation of the law, Parrish said. Protection is limited to three types of closed-ended loans: payday loans, vehicle title loans and refund anticipation loans. These bank loans are open-ended, which means that a bank loans a specific amount of money to a borrower, but once the borrower repays it, he can borrow it again. It's called revolving credit.
The banks don't identify these products as payday loans. Wells Fargo calls its version Direct Deposit Advance; U.S. Bank calls it Checking Account Advance.
Both banks will lend up to $500, and both charge $2 for every $20 borrowed. That would be a $50 charge for $500 borrowed, whether for two days or a month. The money must be repaid within 35 days; payments are automatically deducted from your next direct deposit.
If the money is repaid within a month, the equivalent annual percentage rate is 120 percent; if repaid within 14 days, it's 261 percent. That's the likely scenario for service members, who get paid every two weeks.
But U.S. Bank officials contend that you can't calculate an APR on these lines of credit. "That would mean you make payments over a period of time. You make one payment," said Steve Dale, a spokesman for U.S. Bank. "It zeroes out the next time you have a deposit."
Both banks are emphatic that these products are not payday loans. They are available to service members and their families.
"Direct Deposit Advance is an open-end line of credit — not a loan," said Wells Fargo spokeswoman Richele Messick, in an e-mail response to questions. "Customers can use a portion of their available credit at any time, and payments replenish their line for future use."
U.S. Bank officials said they also consider their product to be a line of credit. "You can't just walk in off the street. You have to be a customer with us for six months and establish an ongoing depository relationship with us, typically a direct deposit," Dale said.
"Customers can't extend or ‘roll over' the advance because the advance and the finance charge must be repaid promptly (typically with direct deposit funds) before the customer can advance again," Messick said.
And this line of credit is only available to customers with established Wells Fargo checking account relationships and recurring direct deposits.
These lines of credit do not violate the 2006 federal law capping the interest rate, Messick said, because the law "applies to closed-end loans, not to line of credit products such as Direct Deposit Advance or credit card accounts." The bank offers this and a wide range of loan products to all its customers, including service members and their families, she said, "all of which comply with applicable federal and state laws."
Bank officials do not disclose how many of these advances they make in a month, or how many they've made to service members, for business reasons.
Bank officials warn customers that the loans are expensive.
"Checking Account Advance is designed for unexpected short-term credit needs and is an expensive form of credit," warns U.S. Bank on its Web site. "If you decide to borrow, borrow only as much as you can afford to repay from your next deposit."
The Wells Fargo Web site says its service "is designed to help our customers meet their short-term borrowing needs. Appropriate emergencies might be a car repair, medical care for you or your family, or travel expenses in connection with your job."
Sound familiar? These emergencies (except for travel expenses in connection with your job, which the military pays for) generally would qualify for financial assistance through the military relief societies.
"We hope to be considered the first resource," said John Alexander, spokesman for Navy-Marine Corps Relief Society. "If they truly need a bridge until payday, we would far rather they come to us."
In 2009, NMCRS provided $12.2 million to 41,558 clients through its Quick Assist Loan program, designed to provide interest-free loans of up to $300 within 15 minutes. That's an increase of 76 percent from 2008. The program was started in January 2008 to help combat the problem of predatory lending.
Defense Department regulations to implement the interest-rate cap law went into effect in October 2007. Because of the law and awareness of payday loan alternatives, NMCRS is seeing fewer problems. Assistance related to payday loan trouble is about one-fourth what it was in 2006, Alexander said.
About half of requests to the Air Force Aid Society are in the form of the Falcon Loan, another alternative to payday loans.
Army Emergency Relief's commanders' referral program, implemented in 2006, allows company commanders and first sergeants to quickly authorize interest-free AER loans of up to $1,000. Across the Army, about 30 percent of AER assistance is through these loans.
Retired Lt. Gen. Robert Foley, AER director, said he encourages soldiers to ask for assistance, even if they think their need may not be covered, because exceptions sometimes can be made.