Regions Bank has announced that it will discontinue its Ready Advance product by the end of the year and will stop offering the controversial short-term consumer loan to new customers beginning next week.
The news comes amid concerns from consumer advocates and increased scrutiny from regulators about similar direct deposit advance offerings from banks.
A handful of banks, including Regions, currently offer deposit advances, which are short-term loans for small amounts that banks offer customers who make recurring direct deposits into their accounts.
Here's how it works. The bank fronts the borrower an advance on his or her next direct deposit. Then, the next time that sufficient funds are deposited into the borrower's account, the bank takes back its money, along with a fee.
Surveys have shown that consumers like deposit advances and payday-loan offerings. But consumer advocacy groups and some lawmakers have called for an end to these products, saying they are predatory and can trap consumers in a debt cycle.
Regions offering new small-loan products
Regions says it will stop offering its Ready Advance to new customers on Jan. 22. It says it is working on a transition plan for current customers who use Ready Advance. In the immediate future, those customers will still be able to get deposit advances until the transition plan is complete, the company says in a statement.
Meanwhile, it announced plans to develop new consumer loan products, including a Regions Savings Secured Loan, which it says customers can apply for now. The new loans come in amounts as small as $250.
"It's clear that consumers have a need for small-dollar loans, and we believe banks have a responsibility to meet that need," John Owen, head of Business Groups for Regions Bank, says in a statement.
In late November, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. finalized guidelines outlining standards that banks should meet if they choose to offer deposit advances to consumers.
The guidelines include such things as having banks assess a consumer's ability to repay the loans before authorizing approval, or having banks institute a cooling-off period, during which a bank should wait one payment cycle -- usually a month -- after one deposit advance is repaid before another advance is offered.
But some banks, such as Wells Fargo and U.S. Bank, have yet to make changes to their deposit-advance offerings as they review the guidance from regulators.
Regions Bank is not subject to the guidelines because it is regulated by the Federal Reserve, which did not sign on to the guidelines.
Richard Hunt, president and chief executive of the Consumer Bankers Association, made it clear in a statement Wednesday that he thinks the regulators' guidance will stymie banks from offering deposit advance products.
"The vast majority of consumers using deposit advance products do so responsibly under transparent and fully disclosed terms," Hunt says in a statement. "Forcing banks out of this business limits options for consumers and pushes them towards payday lenders and fly-by-night entities. While federal regulators encourage banks to serve consumers in need, their actions and policies suggest otherwise."
What do you think of deposit advance options from banks? Have you ever used one?
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