Bank of Oklahoma on Wednesday became the last bank to discontinue a short-term, high-interest loan product that has come under regulatory scrutiny.
The move has consumer advocates cheering the demise of a product they say carried the same triple-digit interest rates and balloon payments as payday loans. Industry groups, however, have decried regulators for forcing banks out of a market that could be taken over by less regulated operators.
In the past week, six banks have abandoned “deposit advance loans,” a form of credit tied to consumers’ paychecks, government benefits or other income directly deposited into their bank accounts. That effectively ended a service that regulators worried could pose safety and soundness risks for banks.
The issue reached a climax in November, when the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. imposed tighter restrictions on the loans. Regulators did not ban banks from offering the product, but the new rules were strict enough to make the line of business unsustainable, banks say.
Officials at all six of the banks that offered deposit advance loans, including Wells Fargo and Regions Financial, said the products they offered were incompatible with what regulators want.
The OCC and FDIC, for example, have required banks to implement a “cooling-off period” that would prevent borrowers from taking more than one deposit advance loan during a monthly pay cycle. But some banks allowed customers to take small advances when needed. Rather than tailor their products to fit the new rules, banks chose to bow out.
Access to Bank of Oklahoma’s “FastLoan” product will end May 31, according to the bank. Customers will soon receive a notice outlining the transition plan and alternative products that are available.
“We understand the difficult situation many of our clients may be in as a result of its discontinuation,” Pat Piper, executive vice president of consumer banking at Bank of Oklahoma, said in an e-mail. “But we are dedicated to providing products that meet our clients’ needs and will be working to find another solution for these clients.”
At least 15 states have banned deposit advance loans, while several others have enforced tough laws to limit the interest rates and the number of loans that can be made. Advocacy groups pressured states to take action as consumers became trapped in a debt cycle trying to pay off their loans.
More than half of direct-deposit borrowers took out advances totaling $3,000 or more, according to a recent study by the Consumer Financial Protection Bureau. Of those borrowers, a majority paid off one loan and went back for another within 12 days. The average borrower took out 10 loans in a year and paid $458 in fees.
Account holders typically paid up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds were not enough to cover the loan, the bank would take whatever money comes in and tack on overdraft fees and additional interest.
In the absence of deposit advance loans, banks such as Regions are developing replacement products to meet the small-dollar credit needs of their customers. It is unknown whether those loans will run into the same trouble as their predecessors. The CFPB is slated this year to hand down rules to govern the payday and deposit advance market and add an extra layer of consumer protection.