Bank customers pay a set fee, typically based on the amount requested. For example, charges could be $2 in fees for every $20 borrowed, according to the Consumer Financial Protection Bureau, the federal agency created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The agency has authority to monitor and enforce consumer financial laws.
Advances are repaid automatically when the next qualifying electronic deposit is made. However, these small dollar, short-term loans usually don’t consider the consumer’s overall outstanding debt and other bills, according to the CFPB.
“We found that the median borrower took 14 of these loans in a year, which means every bank cycle they got, they were in debt to the bank,” said Uriah King, vice president of state policy at the Center for Responsible Lending. The center is based in Durham, N.C., and describes itself as a non-political, nonprofit focused on research of financial issues.
Payday loans are debt traps with annual percentage rates up to 300 percent, King said.
“If you don’t have enough money to pay for a financial emergency, plus all your other bills, and you have minimal savings, there’s no way you can pay off a 300 percent loan all in one lump sum,” King said. “Guess what happens? People re-borrow.”
Federal government regulators issued repeated warnings in 2013 about the risks of making small dollar, high interest loans to customers without evaluating their ability to repay.
The CFPB in April 2013 released findings that raised “substantial consumer protection concerns” about payday and deposit advance products.
Consumers told the federal agency they liked the speed at which these short-term loans are given, the availability of credit for some people who might not qualify for other credit products, and consumers’ ability to use these loans to avoid overdrawing an account or paying a bill late. The concerns surround the risk of not being able to repay the loan while still having enough money left over for other expenses, the high cost of the loan rate, and “aggressive” debt collection practices in the case of delinquency or default, according to the bureau’s report.
“What appears clear… is that many consumers are unable to repay their loan in full and still meet their other expenses,” read the CFPB’s conclusions.
“The high cost of the (payday) loan or advance may itself contribute to the chronic difficulty such consumers face in retiring the debt.”
Bank regulators the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued guidance in November 2013 warning banks under their supervision about the potentially risky practices. The FDIC said it will examine credit quality practices and compliance with consumer laws.
“The FDIC continues to encourage banks to respond to customers’ small-dollar credit needs; however, banks should be aware that deposit advance products can pose a variety of credit, reputation, operational, compliance, and other risks,” the FDIC said.
The guidance “aims to alert financial institutions to the risks posed by certain deposit advance products and to encourage institutions to meet the demand for small-dollar loans through affordable products that are prudently underwritten and designed,” FDIC Chairman Martin Gruenberg said in a statement.
In response, Cincinnati-based Fifth Third on Jan. 17 announced plans to stop enrolling customers in its Early Access deposit advance service after January 31. Fifth Third will phase out the service to existing customers by year end.
There is a “clear and continued need for small dollar, short-term credit solutions,” Fifth Third said in a release, noting it’s committed to offering alternative services consistent with regulatory views.
“A primary objective is to serve customers within the traditional banking system, rather than pushing them into less-regulated providers outside the banking system, where services are more costly,” Fifth Third said in the release. The bank declined comment beyond what was said in the announcement.
U.S. Bank followed suit and said on Jan. 22 it will begin winding down its Checking Account Advance product to “align with final regulatory guidance.”
“We recognize our customers’ need for short-term, small dollar credit,” said Kent Stone, vice chairman of consumer banking sales and support at U.S. Bank, in a statement. “We are committed to finding new solutions that meet the needs of all of our customers and fit within the current regulatory expectations.”
U.S. Bank also declined further comment.
Effective Friday, Jan. 31, U.S. Bank will no longer offer Checking Account Advance to new checking account customers. It will be discontinued for current customers on May 30, 2014.
“I think we’re optimistic they will create a better product, one that’s reasonable termed, fairly priced, and most importantly, the borrowers have the ability to pay the loan back,” said King of the Center for Responsible Lending. “Regulators have made clear that’s their line in the sand for this.”
Fifth Third is the largest bank by deposits in Ohio, and U.S. Bank is third largest, according to the FDIC.
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