For years, banks have been offering a loan product that resembles payday loans. The deposit advance loans have been offered by banks to offer fast access of short-term lending options for consumers who need cash. However, there has been public outcry that these loan products are hurting the consumers. The loans attract high interest rates nearing those of the typical payday loans. In addition, the deposit advance loans are offered for a period of about 2 weeks or a month. The term of paying back coincides with the paycheck time or the time when consumers get other government benefits payments.
Several big banks have decided to quit the small dollar short-term products following a warning by the federal regulators that they would be subjected to scrutiny as to whether the products violate the consumer protection laws. The high-interest payday-like loans offered by the banks, and branded as deposit advance, have similar patterns to those used by the payday lenders.
The period of payment and the timing of paying back can indicate that there is great resemblance of these deposit advances to the typical payday loans. And, since customers are trapped in a debt cycle, they end up almost paying back the amount at annualized interest rate. The average payment period is 175 days in a year. This is close to 6 months, which indicates that the deposit advance is not a short-term product.
Since the loans carry a steep fee, many borrowers are not able to pay them back when the loan is due, usually after two weeks or one month. What happens is that the consumers choose to renew the amount they had borrowed or clear the previous one and take a new one. This is because, most likely, when the consumer pays the current owed amount to the bank, he or she is left with no money to take him or her to the next paycheck time.
This is where the rubber meets the road, as the consumer is now trapped into a state of continuous debt. In November of 2013, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, issued a warning to the banks that offer these payday-like deposit advance loans.
The federal regulators said that the small dollars loans should be affordable, and the ability of the consumer to repay the loans should be looked at when offering the loans. Although the bank’s deposit advance are advertised as convenient ways of obtaining cash, the loans are quickly turned to long term recurring expenses for the consumer because the pay structure does not allow them to be practically short term loans.
The loans carry a high cost debt, which many consumers find it had to pay after their first loan. Many end up extending the repayment period of the first loan, or they borrow another one. This is how the loans translate to long term products. Recently, the U.S Bank said that it would end its deposit advance program by Jan 31, 2014, and for the existing customers, the program would be discontinues by March 30, 2014. This would ensure that the bank aligns with the final regulatory guideline from the federal regulators.
Other banks have followed the same path including the Wells Fargo, which said that the checking accounts opened after Feb. 1, 2014 would not be offered the direct deposit advance loans, and that the existing customers would use the loan service until the middle of the year. Other banks such as Fifth Third Bank have fallen suit.