Facing tough new regulations, some of the country’s largest banks, including Wells Fargo, said Friday that they are abandoning a short-term, high-interest loan product that consumer groups have called a debt trap.
The exit of Wells Fargo, Fifth Third, Guaranty Bank and U.S. Bank could be a harbinger of things to come as banks anticipate tougher rules on an array of consumer products, including prepaid cards.
The big banks are the latest, following Regions Financial Corp. this week, to discontinue “deposit advance loans,” which are tied to consumers’ paychecks, government benefits or other income directly deposited into their bank accounts.
A number of advocacy groups have decried the products for carrying the same triple-digit interest rates and balloon payments as payday loans. Meanwhile, regulators have grown apprehensive about the safety and soundness risks posed by the loans.
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 bar banks from offering the product, but the new rules were stringent enough to make the line of business untenable, banks say.
“The guidance favors a structure that is fundamentally different than our current service,” Wells Fargo spokeswoman Richele Messick said in an e-mail. “It favors a closed-end loan account and our current service is an open-end line of credit.”
The OCC and the FDIC, for instance, 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. That rule ran counter to Wells Fargo’s practice, which allowed customers to take small advances when needed, Messick said.
Starting Feb. 1, new checking accounts at Wells Fargo will not be eligible for direct-deposit advances. The bank, which has offered the service since 1994, said no immediate changes are planned for existing loan customers, who will be able to access the service until mid-year. Wells Fargo said it is working on a transition plan for those customers.
Kent Stone, vice chairman of consumer banking at U.S. Bank, said his company is “committed to finding new solutions that meet the needs of all of our customers and fit within the current regulatory expectations.” The bank will no longer offer its “Checking Account Advance” service to new customers as of Jan. 31.
Fifth Third Bank said it will phase out its service by the end of the year and is developing alternative products. “The Bank has been monitoring industry developments and has proactively engaged with stakeholders as it has looked at the clear and continued need for small dollar, short-term credit solutions for its customers,” the company said in a statement.
Guaranty said checking accounts opened after Jan. 31 will not be eligible for the service. The bank “is dedicated to helping hardworking families achieve their financial dreams and meeting their credit needs,” the company said in a statement.
With the departure of U.S. Bank, Fifth Third, Guaranty and Wells Fargo, the only bank left that will be offering deposit advance loans is Bank of Oklahoma. Bank officials said they have no immediate plans to end their services.
“Forcing banks out of this business limits options for consumers and pushes them towards payday lenders and fly-by-night entities,” Richard Hunt, president and chief executive of the Consumer Bankers Association, said in an e-mail. “While federal regulators encourage banks to serve consumers in need, their actions and policies suggest otherwise.”
A study by the Consumer Financial Protection Bureau found that more than half of direct-deposit borrowers took out advances totaling $3,000 or more. 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 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 and tacks on overdraft fees and additional interest.
At least 15 states have banned the loans, while several others have imposed strict laws to limit the interest rates and the number of loans that can be made. Consumer groups are eager for the CFPB, which has authority over storefront and bank payday lenders with more than $10 billion in assets, to write new rules to govern the industry. The bureau has said it will take up the issue this year.
“We are encouraging the banks we supervise to develop new and innovative programs to meet the small-dollar credit needs of their customers in ways that do not carry the risk of creating a cycle of high-cost debt,” Comptroller of the Currency Thomas J. Curry said in a statement.