Regions Financial Corp. on Wednesday became the first large bank to discontinue a short-term, high-interest loan product that consumer groups say traps Americans in a cycle of debt.
The decision arrives amid regulatory scrutiny of “deposit advance loans,” which are tied to consumers’ paychecks, government benefits or other income directly deposited into their bank accounts. Banking regulators have pressed lenders to consider a borrowers’ ability to repay the loans before signing them up.
Advocacy groups say deposit advance loans carry the same triple-digit interest rates and balloon payments as the payday loans offered by storefront and online operators. But industry groups have argued that placing strict constraints on banks will push people with limited access to credit into the arms of less-regulated companies.
On Wednesday, Regions said it will stop offering its Ready Advance product to new customers on Jan. 22 and phase out the line of credit by the end of the year. Existing customers with active lines of credit will be able to access future advances until the Birmingham, Ala.-based bank completes a transition plan.
Regions spokeswoman Evelyn Mitchell said the company’s decision was “based on a number of industry developments that have emerged since the product was introduced in 2011.” She declined to say whether regulatory pressure played a role.
In April, the Federal Reserve, which regulates Regions, warned banks of the consumer risks posed by deposit advance loans. But the agency stopped short of joining the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in issuing guidance to limit those risks.
That guidance, released in November, called on lenders to institute a “cooling-off period” that would prevent borrowers from taking more than one deposit advance loan during a monthly pay cycle. It also recommended that banks review at least six months of customers’ banking activities to determine whether they could repay the loan.
Consumer groups chided the Fed for not joining the FDIC and OCC, because the decision limited the impact of the guidance to four of the six banks that offer deposit advance loans: Wells Fargo, U.S. Bancorp, Guaranty Bank and Bank of Oklahoma.
While advocates continue to press the Fed to issue guidance, some are encouraged that Regions took it upon itself to discontinue its deposit advance product. Officials at Fifth Third, the other bank regulated by the Fed, said the Cincinnati-based firm has no plans to follow in Regions’ footsteps.
“We applaud Regions for making this move. We need banks to help families build wealth, not strip it away,” said George Goehl, executive director of National People’s Action, a group that last year petitioned Regions to stop offering its deposit advance loans.
A study from the Consumer Financial Protection Bureau found that more than half of direct-deposit borrowers took out advances totaling $3,000 or more. Of these borrowers, well over half 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 pay 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 are not enough to cover the loan, the bank takes whatever money comes in, then tacks on overdraft fees and additional interest.
Despite plans to end its deposit advance product, Regions said it will continue to offer small-dollar loans. The bank on Wednesday started offering installment loans secured by funds in a customer’s savings account. Customers can borrow as little as $250 through the new product.
“It’s clear that consumers have a need for small-dollar loans, and we believe banks have a responsibility to meet that need,” said John Owen, head of business groups for Regions. “We are developing other credit products in 2014 that will appeal to a broad group of current and potentially new Regions customers.”