Several banking heavyweights are abandoning the short-term loan market, now that federal regulators intend to examine whether these high-interest, payday-like loans violate consumer protection laws. Wells Fargo, U.S. Bank, Fifth Third, and Regions all plan to discontinue their deposit-advance products, which are typically short-term loans of a few hundred dollars that are automatically repaid from a customer's checking account each pay period. These loans often have triple-digit interest rates when they are calculated on an annualized basis.
U.S. Bank said Jan. 17 that it would terminate its deposit-advance program at the end of this month for new customers and by May 30 for existing customers. Wells Fargo's "Direct Deposit Advance" will not be offered for checking accounts opened after Feb. 1, and the service will be phased out by mid-2014 for existing borrowers. Regions is ending its "Ready Advance" program as of Jan. 22; and Fifth Third Bank confirmed on Jan. 17 that it will stop offering its deposit advance service on Jan. 31 and wind down the program for existing customers by the end of the year.
While banks claim that such loans help customers who do not qualify for a traditional credit, consumer advocates such as the Center for Responsible Lending (CRL) believe these "predatory" products should be abolished. It says these types of loans carry such high fees that borrowers often are unable to repay them when they are due, which may prompt consumers to renew the existing loan or take out a new one. The group reports that advance loans issued by banks carried an average term of 10 days, with a fee of $10 per $100 borrowed, which amounts to a 365 percent APR. Customers owe money to the bank for an average of 175 days per year.