Wells Fargo & Co. (WFC:US) and U.S. Bancorp are among lenders that plan to stop offering advance loans to direct deposit customers as the business comes under pressure from regulators and consumer advocates.
Wells Fargo, the biggest U.S. home lender, is shutting down its service starting Feb. 1, the company said yesterday in a statement. Minneapolis-based U.S. Bancorp, the nation’s largest regional lender, said its program would end Jan. 31, as did Cincinnati-based Fifth Third Bancorp. (FITB:US)Regions Financial Corp. (RF:US) announced Jan. 15 that it would discontinue its Ready Advance service this year.
Banks are abandoning these products amid intensifying scrutiny from regulators about their high costs and similarities to payday lending. As the majority of lenders offering these services leave the market, they risk losing the potential to generate $500 million in fees as customers seek alternative forms of short-term credit, according to 2010 estimates from Aite Group LLC.
“It’s obviously regulatory pressure strong-arming them, because it’s a product that consumers like and that banks want to offer,” said Todd Zywicki, a law professor at George Mason University in Fairfax, Virgina, who has researched payday lending and deposit advance. “The question is, what happens to these consumers?”
Deposit advance loans attract customers who often can’t qualify for other types of credit. They borrow money that’s secured by their electronically deposited paycheck or qualified direct deposit, paying annualized interest rates of as much as 391 percent, according to estimates from the Office of the Comptroller of the Currency. Typical borrowers take out 16 loans annually and spend more than half the year in debt, according to a study by the Durham, North Carolina-based Center for Responsible Lending, which has urged banks to discontinue the practice.
The OCC, which last year offered banks guidance on advance direct lending, said its main concern was ensuring the products don’t pose “undue risk to safety and soundness.”
“We are encouraging the banks we supervise to develop new and innovative programs to meet the small-dollar credit needs of their customers in ways that do not carry the risk of creating a cycle of high-cost debt,” Comptroller of the Currency Thomas Curry said yesterday in a statement.
Spokesmen for Birmingham, Alabama-based Regions, U.S. Bancorp and Fifth Third declined to comment beyond their firms’ statements. A spokesman for San Francisco-based Wells Fargo didn’t immediately respond to an e-mailed request seeking comment.
The banks exiting the business may still try to retain clients by offering them credit or prepaid cards, said Michael Flores, president of financial services consulting firm Bretton Woods Inc., who has testified before Congress on deposit advance loans.
“Without that product, there is going to be a void and there are very few options,” Flores said in an interview.
For lenders like Wells Fargo, revenue from deposit advance is “substantial because they’ve been offering the product for some time and doing a particularly effective job of marketing it,” said Ron Shevlin of Boston-based Aite Group.
Shevlin’s 2010 analysis found that banks could generate as much as $500 million in new fees annually if advance direct loans displaced payday lending among so-called underbanked customers. Discontinuing the service won’t have a material financial effect on Wells Fargo, the company said in its statement.
The Consumer Financial Protection Bureau last year said it would consider ways to make the practice safer for borrowers, including imposing waiting times between loans. Consumer-interest advocacy groups have also put pressure on banks to end the practice.
Still, as banks withdraw the service, consumers may instead seek other sources of credit that could be even riskier, such as overdraft and payday loans, Zywicki said.
“People who use these products have limited choices already,” he said.
To contact the reporters on this story: Elizabeth Dexheimer in New York at firstname.lastname@example.org; Dakin Campbell in New York at email@example.com
To contact the editor responsible for this story: Peter Eichenbaum at firstname.lastname@example.org