Some Major Banks Will No Longer Offer Payday-like Advances

The high-cost, quick-fix deposit advance loans offered by some banks will be discontinued in 2014 after consumer advocates dubbed the products as debt traps.

As of Saturday, both Fifth Third Bank and Wells Fargo, which had customers in Michigan, will put limits on new customers enrolling in deposit advance products.

Existing customers will have a bit more time to use such loans before the credit products are phased out, but consumers still must prepare for change ahead.

A deposit advance is a small-dollar loan, often for about $500 or less, that's marketed as something to get your finances out of a jam. To be able to get an advance, customers must have direct deposit of a paycheck or other income to a checking account or prepaid card.

The deposit advance is often repaid with the next direct deposit. The bank is often paid first before any other bill payments.

The problem is that if a consumer lives paycheck to paycheck, the consumer can have a hard time paying off a short-term loan without taking on another loan.

After regulators took a tougher stand, banks offering such loans announced plans in January to ultimately end deposit advance. The other banks phasing out the current deposit advance services are Regions Financial, U.S. Bank, Bank of Oklahoma, and Guaranty Bank.

Wells Fargo said new consumer checking accounts opened Feb. 1 or later will not be eligible for its Direct Deposit Advance service. But changes for existing Wells Fargo Direct Deposit Advance customers will take place in mid-year.

Fifth Third said it will no longer enroll customers in its Early Access service Feb. 1 and it will phase out its deposit advance product to existing customers by year end.

What kind of new products might be rolled out is unknown. Fifth Third, for example, said extensive research shows that its customers face a need for this service.

Jack Riley, senior vice president, marketing director for Fifth Third Bank in Southfield, said the bank is working on an alternative product.

Regions Bank already has launched a new fixed-rate installment loan secured by money in a Regions savings account, called the Regions Savings Secured Loan. The bank also plans to develop other credit alternatives, too.

Banking industry experts voiced concern about the new guidance. "Forcing banks out of this business limits options for consumers and pushes them towards payday lenders and fly-by night entities," said Richard Hunt, president and CEO of the Consumer Bankers Association, in a statement.

"While federal regulators encourage banks to serve consumers in need, their actions and policies suggest otherwise," Hunt said.

The Federal Deposit and Insurance Corp. and the Office of the Comptroller of the Currency issued tougher guidance on such short-term loans in November for the banks they supervise.

Regulators said the deposit advance had some similar characteristics to a payday loan — such as high fees and a lump-sum that must be repaid in a short time.

Taking out such a loan at the bank, of course, may lead some consumers to think it is safer than a regular payday loan product.

But the bank products effectively had annualized rates that could range between 225% to 300%, according to the Center for Responsible Lending.

Typically, a bank charges fees in increments of $20 with a fee of $10 per every $100 advanced.

The inability for many consumers to easily repay such loans is a real sticking point.

Tom Feltner, who is the director of financial services at Consumer Federation of America, which is a consumer-advocacy group, said that many times deposit advance loans drove banking customers into a cycle of repeat borrowing and triggered extra rounds of overdraft fees.

"If $400 is due in full, that creates a strong incentive to have to borrow that money again," Feltner said.

Banks looked at how much money was coming in via direct deposit before making such loans.

But the bank would not take into account a customer's regular mortgage payments, utilities or other bills.

Regulators now want banks to consider a borrower's ability to repay, among other things.

Consumer advocates applauded the end of current products.

"It's great news that banks are getting out of the payday loan business," said Lauren K. Saunders, managing attorney for the National Consumer Law Center.

Saunders suggested that banks need to come up with a more affordable small loan product, and a genuine alternative to a payday loan. Among other features, she said, such a product should have a longer time frame for repayment, such as 90 days or longer, and charge an annualized percentage rate of 36% or less.

Resource:  Tompor, Susan. "Some Major Banks Will No Longer Offer Payday-like Advances."USA Today. Gannett, 02 Feb. 2014. Web. 02 Feb. 2014.