This week, Bank of Oklahoma became the most recent U.S. bank to discontinue a high interest financial product known as deposit advance loans. Consumer advocates say these high-cost loans, which are tied to income directly deposited into borrowers' bank accounts, mimic payday loans with their triple-digit interest rates and balloon payments. Industry participants, however, say that driving banks out of the market could open it up to less regulated operators.
Six banks in the past week have abandoned deposit advance loans, effectively ending a service that regulators said could pose safety and soundness risks for institutions. In November, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) imposed tighter restrictions on the loans but did not fully abolish them. Officials at all six of the banks that stopped offering deposit advance loans said the products were incompatible with what regulators want.
At least 15 states ban deposit advance loans completely; others have strict limits on interest rates and the number of loans that can be made in a specific period. More than half of direct-deposit borrowers took out advances totaling $3,000 or more. Of these borrowers, most of them paid off one loan and went back for another within 12 days, according to the Consumer Financial Protection Bureau. The average borrower took out 10 loans and paid $458 in fees in a one-year period.