Wells Fargo said Friday that it will stop offering consumers a costly, short-term loan that has drawn scrutiny from regulators.
The San Francisco-based bank said it will not allow consumer checking accounts opened on Feb. 1 or later to use its Direct Deposit Advance service, which lets customers borrow against future direct deposits. Existing users of the service will have access to it until midyear, the bank said.
Wells Fargo joins other banks that this week said they are pulling the plug on similar products, a decision consumer advocacy groups are applauding.
On Friday, Fifth Third Bancorp said it will discontinue its Early Access product, and U.S. Bancorp said it will stop offering its Checking Account Advance product. Those announcements followed Regions Financial Corp. saying Wednesday it will get rid of its Ready Advance product.
The moves come amid concern from bank regulators over the products.
The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency in November issued guidance to banks regarding such loans. The head of the OCC, Thomas Curry, pointed out to banks the similarities that deposit advance products have with payday loans, including high fees and short repayment periods. Curry warned that the products “can trap customers in a cycle of high-cost debt that they are unable to repay.”
Wells Fargo’s Direct Deposit Advance product allows customers to take out loans of $20 to $500 apiece. The bank charges $1.50 for every $20 advanced.
On its website, Wells Fargo cautions borrowers that the product “is expensive and must be repaid quickly.” According to an example the bank gives, a customer who borrows $300 for 30 days will pay $22.50 in fees. That’s more than the $17.83 it would cost a customer to use a credit card to borrow the same amount.
In issuing their guidance, the OCC and FDIC said banks should be aware that deposit advance products can pose operational and other risks to banks. They said banks should assess repayment ability before offering such products and monitor repeat use of the products by individual consumers.
“The banks figured it was easier to get out of it than to comply with the rules,” said Edmund Mierzwinski, consumer program director for the N.C. Public Interest Research Group.
“One of the biggest concerns consumer groups have had for years is that banks not get into payday lending. Unfortunately, several banks did,” he said. “It was essentially a predatory, high-cost loan.”
He called the banks’ elimination of the products “a great step.”
Payday loans banned in N.C.
Wells Fargo spokeswoman Richele Messick said the bank’s decision to stop offering the loans came in light of the regulatory guidance. Wells Fargo is in 39 states and the District of Columbia but offers the loans in just 24 states, not including the Carolinas, she said.
The bank has made the loans available since 1994, she said.
Bank of America spokeswoman Nicole Nastacie said the Charlotte-based bank does not offer such loans.
Payday loan businesses are banned in North Carolina, but state Attorney General Roy Cooper said lenders continue to use the Internet to offer such loans.
Just last month, Cooper’s office said it had filed suit against payday lender Western Sky, based in American Indian territory in South Dakota. Cooper said more than 100 complaints have been logged with his office about the company. The federal Consumer Financial Protection Bureau has filed a lawsuit against the company that funded Western Sky’s loans.
The elimination of the deposit advance products comes at a time when banks are trying to grow revenue amid low interest rates and lackluster demand for loans.
“This is another example of regulatory pressures creating another headwind for banks seeking revenue growth,” said Daniel Marchon, an analyst with Raymond James & Associates.
Roberts: 704-358-5248; Twitter: @DeonERoberts
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