Updated Jan. 17, 2014 5:46 p.m. ET
Large U.S. banks will stop offering consumers a form of short-term borrowing that has attracted regulatory scrutiny and a chorus of complaints from consumer advocates over the costs of the loans.
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Wells Fargo & Co.
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and
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Fifth Third Bancorp
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said Friday they would stop providing so-called deposit advance loans, which allow customers to borrow money against future deposits into their checking accounts.
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Regions Financial Corp.
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earlier this week said it planned to discontinue a similar service by year’s end.
The banks pitched the loans as alternatives to payday loans, which are short-term loans offered by nonbank lenders that typically last a couple of weeks and can carry annual interest rates exceeding 300%.
But consumer advocates have complained that the banks’ products, like payday loans, carry exorbitant fees and short repayment terms that can cause borrowers to fall into a cycle of debt.
Federal regulators in November issued guidelines for banks that provide the loans, saying lenders need to assess a borrower’s ability to repay the loans. The guidelines were issued by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.
Comptroller of the Currency Thomas Curry said in a statement Friday that the regulator is “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.”
U.S. Bancorp said it would cease offering Checking Account Advance—which allows clients to borrow money against future deposits into their checking accounts—to new checking account customers starting Jan. 31. The Minneapolis-based lender plans to discontinued the product for current customers on May 30, and customers with outstanding balances at that time will be offered extended repayment terms, the bank said.
San Francisco-based Wells Fargo, meanwhile, said new consumer checking accounts opened beginning Feb. 1 won’t be eligible to access the Direct Deposit Advance service. There are no immediate changes for existing customers, who will be able to access the service until midyear.
At Fifth Third, the company said it no longer would enroll new customers into the so-called Early Access product after Jan. 31. The bank also plans to phase out the service to existing customers by the end of the year.
The Cincinnati-based bank also said it is looking to offer alternative products by early 2015.
Banking regulators last year called for lenders to analyze customers’ ability to repay the loans, but some banks complained that doing so would make the loans too costly to offer.
U.S. Bancorp previously said the regulators’ proposal would “limit the bank’s ability to provide deposit-advance products to most customers.”
The guidance didn’t apply to Regions Financial or Fifth Third Bancorp because they are regulated by the Federal Reserve, which didn’t join the OCC and FDIC. The Fed said in April that it was concerned about the risk of such loans but deferred judgment to the Consumer Financial Protection Bureau, which has been studying ways to regulate such loans.
Consumer advocates hailed the banks’ moves. The products “harm consumers through high rates and an insufficient consideration of borrowers’ ability to repay without additional borrowing,” said
Tom Feltner,
director of financial services at the Consumer Federation of America. “This is a very positive step for consumers.”
But industry groups lamented the loss of the product.
“Forcing banks out of this business limits options for consumers and pushes them towards payday lenders and fly-by-night entities,” said
Richard Hunt,
chief executive of the Consumer Bankers Association.
— Everdeen Mason contributed to this article.
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Major Banks Eliminate Short-Term Loans Amid Regulatory Scrutiny – Wall Street Journal
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