The Newest Bank Product Under Fire: Deposit Advance Loans

NEW YORK (MainStreet) —  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 They?

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.