With federal banking regulators warning that they will be looking into whether deposit advance loans violate consumer protection laws, several banks have decided to avoid potential problems and drop the product altogether.
Deposit advance loans are small-dollar, short-term loans that are automatically repaid when a direct deposit is made to the customer’s checking account or reloadable prepaid card.
Regions Financial Corp. was the first to announce that it would no longer offer deposit advance loans as of January 22. Although the bank did not specifically identify regulatory oversight as the basis for terminating its “Ready Advance” loan product, it did issue a statement indicating that the decision “was based on a number of industry developments.”
Days later, Regions was followed by Wells Fargo, U.S. Bancorp, and Fifth Third Bancorp, all of which similarly announced the decision to phase out their deposit advance loan products beginning in January. Explaining the decision, Fifth Third’s statement noted that the bank had been “monitoring industry developments,” while a spokeswoman for Wells Fargo said that recent guidance from federal agencies “favors a structure that is fundamentally different than our current service.”
U.S. Bank was more direct, stating that the move would “align” the bank with guidance from the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Noting customers’ need for short-term, small-dollar credit, U.S. Bank indicated that in lieu of its Checking Account Advance product, the bank would be “finding new solutions that meet the needs of all of our customers and fit within the current regulatory expectations,” according to a statement from Kent Stone, vice chairman of consumer banking sales and support.
Given the increasing scrutiny on deposit advance products by both state and federal regulators, the moves do not come as a huge surprise. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency recently issued guidance about deposit advance loans, cautioning financial institutions about the “credit, reputational, operational and compliance risks” associated with the products (see previous newsletter, here).
The “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” advised banks to assess a customer’s ability to repay the loan with a six-month historical check, consider ongoing eligibility reviews on a six-month basis, and outlined a “cooling off” period of at least one monthly statement cycle after an advance loan has been repaid before another advance loan can be extended.
Why it matters: With major banks calling a halt to offering the products and phasing out existing customers, deposit advance loans appear to be fading away. Even with this trend, the Consumer Financial Protection Bureau is continuing its investigation into deposit advance loan products. The agency released a controversial white paper last April and has indicated that rules could be forthcoming in 2014.