Regulatory guidance finalized in November has delivered an ultimatum to banks providing short-term credit in the form of deposit advances: either rework the model so that these small-dollar, payday-like loans stay profitable while satisfying with the new rules, or exit the business.
The standards issued by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency require banks to gauge borrowers' ability to repay without a rollover. Additionally, they will be required to reevaluate customers' eligibility every six months, based on factors such as their total credit obligations and how frequently they overdraw their checking accounts. Moreover, banks will have to observe a "cooling-off" period of at least one statement cycle after a borrower pays of a loan before they can offer that same customer additional credit. That provision could slash bank revenue from the products by as much as 90 percent, according to one estimate.
Four banks, including Wells Fargo and U.S. Bancorp, will have to decide right away whether the changes are too much; while others in the niche will be watching closely to see if these institutions can successfully devise a new formula for the product.