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Regulators warn banks over high-interest, direct deposit loans


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SALT LAKE CITY — People by the millions turn to payday lenders when they need emergency cash. But some use direct deposit advances to make ends meet when they have no money until pay day.

Now, federal regulators are pretty much telling federally insured banks to stop making short-term loans with balloon payments.

Linda Hilton, director of the Coalition of Religious Communities, helped lead the effort to get credit unions in Utah and nationwide to stop direct deposit advances. She said they're dangerous because of the hefty fees, reaching close to annual percentage rate of 300 percent in some cases.

Many borrowers have had to get a new loan to pay off the old one.

"Loaning money to people who are already so far in debt, all this does is create a debt cycle they can't get out of," she said.

Right now, six federally-insured nationwide banks use this sort of loan program. Two have a presence in Utah: Wells Fargo and U.S. Bank. The banks have said the huge fees are in line with the high risk of default.

Hilton said there's no valid argument for triple-digit interest rates.

"You borrow $100 and you pay $10 interest a week. You do that for 10 weeks, you've paid the loan back in 100-percent interest. And, you still owe the full loan amount," Hilton said.

Loans banned
Fifteen states ban high-interest loans. Utah is not one of them.

That is why the FDIC and another federal agency called the Office of the Comptroller of the Currency want to stop direct deposit advances. In a new 22-page guidance, they spell out to how the practice will hurt the reputations of banks and their bottom lines, since in many cases they don't even check a patron's credit before issuing an advance.

"They're giving them to the consumer with no consideration of their ability to repay," Hilton said.

KSL asked both Wells Fargo and U.S. Bank about the new guidance from federal regulators. They said they're reviewing it to see how it affects their direct deposit advance programs.

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Bill Gephardt

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