Fifth-Third Bank recently announced that they will cease offering their payday loan product “Ready Advance,” also known as “Early Access loan.” This occurred after pressure was put on it by federal bank regulators. Those who qualified for the payday advance loan were customers of Fifth-Third Bank who had an automatic payroll deposit account. A similar product is offered by other major banks such as Wells Fargo and Bank of America.
According to the loan contract, customers were to pay an APR of 120% for the payroll advance loan, which is based on a 30 - day loan term. Customers were charged fees for every $100 borrowed, and repaid the loan with their next direct deposit. However, in most instances the bank repaid itself the loans from direct withdrawals from a customer’s account in less than 30 days. This resulted in the customer actually paying a much higher APR on the loan and having to take out multiple loans within the same 30 day period and paying multiple fees.
The Federal Consumer Protection Bureau released a white paper which indicated that these payroll advance loans in reality have an average interest rate of over 300%. This consequently puts the customer into a cycle of debt with multiple loans from which they can never escape.
This loan practice is harmful to the consumer and to the economy. A study done byInsight, a report by The Center for Community Economic Development, reported that 56,230 bankruptcies were related to payday loans. It is estimated that as a result, the US economy lost $774 million in consumer spending.
Fifth-Third’s payroll advance product exceeded the interest rate permitted by the Ohio short-Term Lending Act of for payday loans. In Ohio, state usury laws protect borrowers by implementing a maximum interest rate limit that can be charged on a loan. Short term “pay day” loans are limited to 25% maximum interest.
Spangenberg Shibley & Liber LLP and its co-counsel represent a class of individuals who were misled by Fifth-Third Bank and their payday loan contracts. The advance loans were initially developed to help customers acquire an emergency line of credit that was more affordable than traditional payday loans. However, most customers have found themselves incurring higher fees high interest rates than promised, and more debt because of the misleading interest rate charges.
Due to the extremely high cost of the loans, government and bank regulators have determined that the advance loans are a bad practice for banks to be engaging in. In April of last year, The Federal Reserve warned banks of the consumer risks posed by the advanced loans. Close scrutiny on payday loans have caused Fifth-Third to pull their “Advance” product from the market in January of 2014 for new customers, and discontinue the program entirely for existing customers by the end of the year.