Four of the country’s largest commercial banks are ending their “deposit advance” programs amid fears that the high-interest, short-term loans will get caught up in a broader crackdown on the previously unregulated payday lending business.
Regions Bank announced last Wednesday that it would end its ReadyAdvance program, which had allowed depositors who receive regular direct deposits to take out short-term loans in advance of those scheduled cash infusions. U.S. Bank, Fifth Third Bank, and Wells Fargo also terminated their versions of the deposit advance loan idea last week. The banks had initiated the practice in 2009.
These programs generate $500 million in fees for the banking industry every year, according to one 2010 estimate. The decision to forgo that revenue — which is almost risk-free since the lending bank can simply deduct the interest charged on the loan from the account holder’s next deposit — suggests that banks fear that the loans are on the wrong side of consumer protection laws that are just beginning to be enforced in the marketplace for paycheck advances. States like Utah and Alabama are trying to get tougher on payday lenders, but the industry has evaded such state-level crackdowns before. This time the feds are involved, with the Consumer Financial Protection Bureau (CFPB) setting payday lending abuses near the top of its list of targets and even winning an unprecedented legal settlement against one such lender late last year.
That federal effort primarily targets brick-and-mortar payday lenders, which lure 12 million people into short-term loans with astronomical interest rates each year, sucking $3 billion out of the poorest communities annually in the process. The programs banks are terminating operate somewhat differently. Payday lending stores make credit available to almost anyone, while bank programs are only available to people with well-established histories of direct deposit activity. When a borrower falls behind on a standard payday loan the lender sends debt collectors after her, while a bank would simply deduct the debt from the next deposit that same kind of borrower received.
Despite these differences, the outcomes for consumers are similar. Bank deposit advance loans typically charge annual interest rates of between 225 and 300 percent — lower than the 300-500 percent rates typical of payday loans, but still high enough to trap borrowers in perpetual debt cycles. Half of all bank deposit advance program users took out more than $3,000 in advance loans in a single year, and spent more than 40 percent of the year paying the loans back, according to the CFPB. Like with traditional payday loans, the paperwork on bank deposit advance programs makes it somewhat difficult to understand exactly what fees will be charged and when, and obscures the financial harm that can arise if a borrower uses the program very often.
Even after these banks’ decision to end their own in-house payday lending programs, the banking business will remain deeply entwined with the neon-sign version of payday lending. Brick-and-mortar payday lenders get much of the financing they need to operate straight from the country’s biggest, most reputable banks.