Wells Fargo and U.S. Bank are still offering deposit advances six weeks after regulators finalized sweeping guidance that raised doubts about the product's viability.
As of Friday afternoon, the two big banks were still offering the product which bears a strong resemblance to the payday loan on their websites, with terms that appear out of compliance with the guidance.
Judging from public statements, the banks' primary regulator has not blessed the product's continuation, even in the short term. The Office of Comptroller of the Currency, which issued the guidance alongside the Federal Deposit Insurance Corp., says the document became effective in late November, and there is no grace period.
"Banks that fail to comply with the guidance should expect that the OCC will take appropriate supervisory action, and enforcement action if necessary, to prevent harm to consumers, ensure compliance with appliance laws, and address any unsafe or unsound banking practice or violations of law associated with these products," OCC spokesman Bryan Hubbard says in an email.
Behind the scenes, banks that currently offer deposit advances and are subject to the new guidance only Wells (WFC), U.S. Bank (USB) and two smaller institutions fit that description are said to be hurriedly evaluating their options.
The biggest question facing the four banks is whether the deposit advance can be reconfigured in a way that meets the new regulatory standards and still makes business sense. At the same time, the banks are trying to determine how long they have to complete their evaluation process.
"How long do they have?" says a banking industry lawyer who asked not to be identified, citing the sensitivity of ongoing talks with regulators. "I think what people are asking is: Is it 30 days? Is it 90 days? Is it 180 days?"
Spokespeople for Wells and U.S. Bank declined to say whether they have made any changes to their deposit advance products since the guidance was issued in late November. But a review of their websites suggests that what they're currently offering is not in compliance with the guidance.
The guidance contains a provision stating that banks should allow at least one statement cycle (which is typically a month) to elapse between the repayment of one deposit advance and the offer of a second loan.
Yet Wells' website states that customers can use the product for six consecutive statement periods, while U.S. Bank's site says that the bank may limit access to the product if a customer uses it in nine consecutive statement cycles.
A Wells Fargo spokeswoman said this week that the company is reviewing the guidance. U.S. Bank is working closely with regulators as it plans its next steps, according to a spokeswoman.
The other two banking companies that are subject to the guidance and currently offer the loans are BOK Financial (Nasdaq: BOKF) in Tulsa and Guaranty Bank in Milwaukee. A BOK Financial spokeswoman said the company is evaluating the guidance, while Guaranty Bank did not respond to a request for comment.
The guidance requires changes that some analysts believe will doom the deposit advance. For example, the guidance requires banks to evaluate the borrower's ability to repay without rolling the loan over. That would likely disqualify many of today's borrowers.
Assuming that banks eventually decide to stop offering deposit advances altogether, one question they'll face is how quickly to phase out existing borrowers.
"If you've got somebody who, rightly or wrongly, relies on these types of programs to get them from paycheck to paycheck, I think it's difficult to say we're closing out the program completely,'" the banking industry lawyer says.
Deposit advances draw frequent criticism from consumer advocates, who say they trap borrowers in a debt cycle. When the OCC announced its guidance in November, Comptroller Thomas Curry echoed the consumer advocates' arguments.
"Deposit advance products share a number of characteristics with traditional payday loans, including high fees, short repayment periods, and inadequate attention to the ability to repay. As such, these products can trap customers in a cycle of high-cost debt that they are unable to repay," Curry said.