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Overdraft protection may be at the center of the Consumer Financial Protection Bureau’s inquiry into checking-account practices, but consumer advocacy groups have another banking product they’d like the bureau to immediately examine.
Nearly 250 advocacy groups petitioned federal regulators last week to stop banks from offering deposit advance loans. However, the product in question is one many consumers are unfamiliar with. Here’s a breakdown of what you should know about the issue.
What Are Deposit Advance Loans?
Deposit advance loans essentially allow checking-account holders to get an advance on an electronically deposited paycheck or qualified direct deposit. They are currently offered in some incarnation at four major banks: Wells Fargo calls it Direct Deposit Advance; US Bank calls it a Checking-Account Advance; Regions Bank, which operates out of 16 states, calls it Ready Advance; and Fifth Third Bank, which operates in 12 states, calls it Early Access.
These loans are offered on a short-term basis and generally must be repaid through the consumer’s next direct deposit or within 35 days of the advance. They’re also expensive.
US Bank, Fifth Third Bank and Regions Bank each charge the equivalent of $2 for every $20 advanced and Wells Fargo charges $1.50 for each $20 advanced. When you run the numbers, this works out to annual percentage rates of 120% and 90%, respectively.
Advocates assert that the high costs associated with these short-term loans are similar to those being offered by payday lenders.
“These products are designed to trap people,” says Kathleen Day, spokeswoman for the Center for Responsible Lending, the nonprofit group that spearheaded the petition. Day explains that an analysis of actual checking-account activity conducted by the CRL found that consumers taking out these advances stay in debt for 175 days per year, despite the fact that the loan must be paid back in a month.
Comparatively, an average payday borrower is in debt for 212 days.
In most instances, the loans are not new. Wells Fargo has actually offered Direct Deposit Advance since 1994, while US Bank and Fifth Third introduced their products in 2006 and 2008, respectively.
Regions introduced Ready Advance in May 2011. A month later, the Office of the Comptroller of Currency proposed guidelines addressing bank deposit advance loans, a move the CRL says inadvertently legitimizes what it believes is a predatory product.
“A year ago the industry didn’t have the green light to pursue this,” Day says. She adds that Fiserv Inc., a provider of software systems to the financial industry, recently launched a product called Relationship Advance, which allows banks to provide credit to help bridge short-term deficits. “We’re trying to stamp out [the service] before it becomes widespread,” she says.
What the Banks Are Saying
“We put in place strict limits and protections to help customers avoid becoming overextended,” says Teri Charest, a spokeswoman for US Bank. This includes limiting how long a customer can use the option, enforcing a mandatory cooling off period (meaning they must go a certain time without using the loan) and providing information about alternative, low-cost credit options that may be available.
Similar restrictions are in place at the other financial institutions offering the service. For instance, Regions reports the repayment history to the credit bureaus, which helps customers establish or build their credit. Wells Fargo does not report its data to credit bureaus, while US Bank and Fifth Third did not respond for comment on this practice.
All four banks also point out that the product is not meant–or marketed–for mass consumption.
“You’re never going to walk into a store and see a poster about this product,” says Richelle Mesnick, a spokeswoman from Wells Fargo. “It is designed to get a customer through an emergency situation.”
What Happens Next
Banks currently offering deposit advance loans don’t have immediate plans to amend them as they say it serves a need among their customers.
“There is a need for short-term credit quickly,” Mesnick says.
The CFPB has not responded directly to the consumer watchdog petition, but has said it that will include these products in its inquiry into payday lending that is currently under way. Deposit advance loans are actually named specifically in the CFPB’s examination document that outlines which products and services the agency will regulate.
Banks reiterate that the product should only be used in emergency situations, while consumer advocates advise people to avoid the product entirely.
“It’s not something that really helps,” Day says. “People should stay away from them.”