Regions Financial Corp. this week became the first big bank to discontinue deposit-advance loans, a short-term, high-interest product now under regulatory scrutiny. Consumer groups say these products, which are tied to direct-deposit income such as paychecks or government benefits, bind Americans in a cycle of debt.
A study from the Consumer Financial Protection Bureau found that the average direct-deposit borrower took out 10 loans in a year and paid $458 in fees. Account holders usually pay up to $10 for every $100 borrowed, intending to repay the debt with their next direct deposit. They incur additional interest and overdraft penalties, however, if their deposited funds fail to cover the loan. Consumer interests complain that deposit-advance loans carry the same triple-digit interest rates and balloon payments as payday loans, while industry groups warn that tight controls on banks could drive consumers toward less-regulated forms of credit.
Regions will stop offering its Ready Advance product to new customers starting Jan. 22, and will phase out the line of credit by the end of 2014. Spokeswoman Evelyn Mitchell said the company’s decision was “based on a number of industry developments that have emerged since the product was introduced in 2011,” but did not say whether regulatory pressure was a factor. In April, the Federal Reserve warned banks of consumer risks posed by deposit-advance loans. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. went further and issued guidance to limit those risks, calling on lenders to institute a “cooling-off period” to prevent borrowers from taking out more than one such loan during a monthly pay cycle and recommending that banks review at least six months of banking activities to determine customers' ability to repay a loan.