A decade after North Carolina outlawed payday lending, the short-term, high-interest loans are making their way back into the state through banks, consumer watchdogs say.
Regions Bank, which an Alabama-based bank that has six branches in North Carolina, offers a product it calls "Regions Ready Advance," which allows consumers to borrow up to $500 by pledging the next direct deposit that comes into their bank account.
"If they weren't a bank, they wouldn't be able to offer this product in North Carolina," said Chris Kukla, senior vice president with the Center for Responsible Lending, which leads a coalition of groups opposed to what they describe as abusive loan practices. The effective interest rates for Ready Advance loans could be as high as 365 percent annual percentage rate, Kukla said.
But Regions said the payday moniker doesn't precisely fit what they are doing. A spokesman for the bank says it is closer to other types of consumer loans.
"Basically it operates more or less as a small-dollar line of credit," said Regions' spokesman Mel Campbell.
Payday lending banned in NC
North Carolina allowed payday loans for four years from 1997 until 2001, but lawmakers allowed legislation authorizing the store-front shops to expire under pressure from consumer advocates, regulators and the military.
Although the fees were typically small, they amounted to annual percentage rates that far exceeded the state's usury laws. And because they had to be repaid quickly – often in one lump sum – they could recreate the problems that forced a user to seek a short-term loan in the first place.
"The loans are a highly controversial form of credit, as borrowers find fast relief but often struggle for months to repay obligations marketed as lasting only weeks," according to a report by the Pew Charitable Trusts.
Some store-front shops stayed open in North Carolina past 2001 by aligning with banks, a practice North Carolina's Department of Justice sued to stop.
Since then, banks avoided offering products similar to payday lending, at least partially in deference to North Carolina's laws.
Regions Bank began offering its Ready Advance product here 18 months ago, Campbell said. Kukla said that he views this as the first time a bank has broken what was an de facto embargo on the practice, but it may not be the last. He said SunTrust, a much larger bank that has seven branches in Raleigh alone, has approached consumer advocates to discuss bringing in a similar product.
"We are constantly evaluating our product offerings to ensure we’re competitive and meeting the needs of our clients; however, we’ve not announced a product like that and we don’t comment on speculation about what we may or may not be considering," said Hugh Suhr, a SunTrust spokesman.
The fees for payday products were typically $16 per $100 borrowed. Regions' Ready Advance product charges $10 per $100. That seems like a small number, but a report by the Center for Responsible Lending says that amounts to an effective annual percentage rate of 365 percent.
Campbell would not speak to that figure, but said the bank publishes its APR for those who convert their Ready Advance loan to an installment loan. That APR is 21 percent. And, he says, there are important differences between payday storefronts and the Ready Advance loans.
"This is a product that's available to our existing customers," he said. Customers have to have been with the bank for at least nine months. Campbell could not say how many customers take out a series of Ready Advance loans – something that consumer advocates say can be a costly cycle of debt. But the bank does have a mandatory "cooling off period" for those who take out loans for six months in a row.
Kukla said that there are better options for people who need short-term loans. He points to a low-cost, small-dollar loan pioneered by the N.C. Employee's Credit Union, which charges only a few dollars up front and are attached to features designed to get a consumer out of debt.
Campbell said Regions also offers customers advice and access to other products.
Customer demand can trump advocates' concerns
In many respects, the arguments surrounding Ready Advance loans are familiar. While consumer advocates worry about high costs and cycles of debts, lenders say they're merely offering a product that their customers demand.
Campbell said a recent survey of Regions Bank customers found that 30 percent were using products loosely defined as "alternative financial products." Ready Advance was an attempt to meet that need.
In June, Regions Bank executive John Owen found himself defending the product at a California low-income banking conference, as reported by American Banker, an industry magazine.
"Customers have real emergencies, real needs. … People walk into those storefronts every day by choice," Owen said, as reported by the magazine. "We view this as a way to pull more people into the regulated banking industry, and I think that is perceived as a good thing. It is [perceived that way] by us."
In addition to what they deem to be high interest rates, advocates with the Center for Responsible Lending are critical of other features of the loans. For example, customers who use Ready Advance can't link overdraft protections to a credit card. If repayment of their loans exceeds their bank balance they end up paying higher overdraft fees.
Nationally, regulators such as the Consumer Finance Protection Bureau have taken notice of this banking trend. The new federal agency held a public hearing in Birmingham, Ala., in January regarding payday loans. Regulators have also begun to take notice closer to home.
"We only have secondary information on the product but it appears to be a form of short-term credit much like (payday loan)," said Ray Grace, Acting Commissioner of Banks.
Grace's agency can't directly regulate Regions Bank because it operates under Alabama state banking laws and is regulated for interstate purposes by the Federal Reserve. Officials with the Federal Reserve were unavailable Friday to answer questions about how they might deal with banks that are offering products that might otherwise run afoul of state banking laws.
Kukla said his group is lobbying state officials to press federal regulators to take action against the bank.
Grace said he couldn't offer more specific comments on the Ready Advance product. "However, I understand the matter has been referred to the Attorney General’s Office, where it is under consideration," he said
"This product has recently been brought to our attention, and we certainly have concerns based on what we have heard," said Jennifer Canada, a spokeswoman for Attorney General Roy Cooper. "Products like these may seem like a quick solution to a cash crunch, but they’ll generally cost consumers a lot more in the long run. We would need to gather more information to determine whether we would have the legal authority to take any action given the fact that Regions Bank is chartered in Alabama."