Don't Bank on Bank Cash Advances

Not even if you're name is Wells Fargo (NYSE: WFC  ) can you escape the wrath of bankers who don't want competition from the payday industry. New regulations by the FDIC and the Office of the Comptroller of the Currency are being targeted at the loans provided not by payday lenders, but rather by the big banks, like Wells and US Bank. 

Many may not realize that, while the payday industry is often characterized by the banking industry as a bunch of loan sharks engaging in predatory lending on the poor and unaware, some of the largest banks themselves commit the heresy of offering short-term loans to borrowers. 

Wells, US Bank, Fifth Third Bancorp, and Regions Finance all offer payday loans that are many times more insidious than those offered by traditional payday lenders. Unlike First Cash Financial or EZCORP (NASDAQ: EZPW  ) , payday loans by the big banks actually have ready access to your checking account (you need to have one of them first to get a payday loan from them) and they freely dip into it to automatically remove your payment and fees. Payday lenders can't do that.

There's a level of risk involved in providing the unbanked and underbanked with an unsecured loan, which the industry's critics ignore. In 2012, EZCORP made $366 million worth of consumer loans, $314 million of which were repaid. That 15% of defaulted loans was up from 13% the year before, as it didn't have the luxury of dipping into the borrower's bank account.

The default repayment option for a Wells Fargo Direct Deposit Advance is automatic repayment from the borrower's checking account. There is an option to make a payment by mail, but you have to call the bank to request that option, and you have to do it before you get an advance. Moreover, as your direct deposits are deposited into your checking account, Wells Fargo will take its payment as soon as the money hits your account. 

The bank's regulators want to crack down on them, requiring that they first assess a borrower's ability to repay, along with identifying what the annual percentage rate of these payday loans are. As critics have contended when it came to traditional payday lenders, a 15% interest rate on a two-week loan equates to an APR of about 300%.

Now, if we can just get the banks to publicize the APRs on the other fees they charge. The FDIC notes that, if you overdraw your account by $20, and the bank charges you $27 for doing so (the average these days), that's equal to an APR of $3,520%! And that $2 fee for withdrawing $20 from the ATM works out to a 260% APR. 

By all means, disclosure is important, and the banks have angled for greater scrutiny of the payday industry. Now the payoff is coming, because they're coming under the magnifying glass themselves.

While personal debt levels remain excessive, there's no comparison to the tab the federal government has run up. The U.S. has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on? The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!