In early 2014, the four major banks still offering customers payday loan-like services announced they would discontinue their often under-fire programs by the end of the year. Apparently Fifth Third Bank has changed its mind, announcing plans to continue with a revised, supposedly less harmful version of the service for existing customers. But consumer groups say the revamped service doesn’t actually address the problems that led banks to discontinue programs in the first place.
The Cincinnati Business Courier reports that Fifth Third Bank backtracked on its previous promise to shutdown its Early Access program by the end of the year and instead will continue offering short-term loans to customers already enrolled in the program.
Fifth Third Bank says it has worked to revise its existing program, which lends up to half of a customer’s monthly direct deposits but no more than $1,000 at a time, to make it less harmful to consumers.
Former bank deposit advance services differed little from the typical storefront payday loan operation – both offered high-interest, short-term loans meant to get consumers out of emergency financial situations, but in reality were found to trap them in an ongoing cycle of debt.
Revisions of the Early Access service include a reduction of the transaction fee from 10% to 3% of the amount of each advance, increasing the repayment deadline for each advance from 35 days to 45 days, and a reduction in the number of months a customer may advance the maximum credit limit from six to three months.
Additionally, the bank says that the maximum credit limit is reached for three consecutive months, the customer will be ineligible for an advance for 30 days following the third month.
Those might seem like improvements on paper, but consumer groups say in practice the changes likely aren’t enough to actually prevent the debt trap perpetrated in previous bank payday-like services.
Diane Standaert, director of state policy for the Center for Responsible Lending, says based on the program’s terms posted online consumers would face many of the same payday loan issues they have in the past.
“From the website, it looks like a borrower could still be indebted at triple-digit interest rates for 365 days a year with this product,” she tells Consumerist.
While the service’s revisions give consumers 45 days to pay back the loan, Fifth Third’s terms show that an automatic repayment would be taken from the borrower’s account at the time of their next direct deposit. That means the length of the loan could be significantly shorter, which raises the calculated APR to higher than three digits – just like traditional payday loans.
Even with a charge of just 3% of the amount financed, a consumer taking out an advance for 12 days could reach interest rates in the triple digits, Standeart says.
Although the service reduces the number of months that consumers can advance their maximum credit limit, it doesn’t prevent borrowers from taking on more debt than they can handle, leaving them indebted for 365 days of the year, Standaert says.
Additionally, Suzanne Martindale, policy counsel for our colleagues at Consumers Union, says the revised program doesn’t address a borrower’s ability to repay. This is a huge concern among bank regulators, and the reason for the end of bank-operated advance programs.
Last December, the Federal Deposit Insurance Corporation (FDIC) – which regulates banks like Regions and Fifth Third – and the Office of the Comptroller of the Currency (OCC) – which oversees institutions such as Wells Fargo and U.S. Bank – issued guidance directing their banks to asses borrower’s ability to repay and limit repeat lending. The 22-page guidance document essentially told the banks to end payday loan-esque practices.
“I think they are on borrowed time with this program,” Martindale tells Consumerist. “If they want to avoid further scrutiny from regulators, they would do best to end the program and work instead to develop safe, sound alternative small-dollar credit products that comply with current guidance and regulations.”
Fifth Third Bank, U.S. Bank, Wells Fargo and Regions were the largest in just a handful of depository institutions that still offered direct deposit advance loans before they each announced they would discontinue their programs in January.
The banks had come under increased scrutiny by federal and state regulators in recent years.
In addition to the FDIC and OCC guidance report, the banks faced criticism from five U.S. senators who in January 2013 asked regulators to put a stop to bank payday loans. In the letter, the senators urge the Federal Reserve, FDIC and OCC to stop federally regulated banks from engaging in payday lending and to prevent further expansion of payday lending before this predatory practice spreads.
Fifth Third revamping short-term payday loan service [Cincinnati Business Courier]