Fifth Third, Regions Tally Damage from Deposit Advance Price Drop
Fifth Third Bancorp has lowered fees and eased terms on short-term, small-dollar loans as it awaits clearer guidance from regulators on the product's future.November 3
Bankers are mulling new ways to serve consumers with low incomes and poor credit profiles after the crackdown on deposit advances, but the prospect of smaller profits and continuing uncertainty about regulations may dissuade a serious effort.February 19
Wells Fargo (WFC), U.S. Bancorp (USB), Fifth Third Bancorp (FITB) and Guaranty Bank of Wisconsin all pulled the plug Friday on a controversial lending product that competes with payday loans.January 17
Fifth Third Bancorp expects to lose $100 million this year in net interest income as a result of a steep price reduction on a controversial short-term consumer loan product, the company said.
Meanwhile, Regions Financial revealed that it lost $4 million in fees during the fourth quarter as a result of its decision to stop offering a similar product.
Fifth Third and Regions are the latest banks to detail the financial fallout of the regulatory crackdown on the product, which is known inside the banking industry as a "deposit advance," and derided by critics as a "bank payday loan."
Early last year, U.S. Bancorp's chief financial officer said that his company's version of the deposit advance product, which is no longer available, earned approximately $50 million per quarter.
Other banks that discontinued the product last year in response to regulatory guidance include Wells Fargo and BOK Financial.
By reducing the consumer's cost of borrowing by 70%, Fifth Third is the first bank to try to salvage the deposit advance.
Under the new terms, which took effect Jan. 1, consumers pay a $3 fee for a $100 advance. That's down from $10 before. Customers also have 45 days to repay their advances, rather than 35 days. In addition, there are changes meant to cut down on borrowers rolling over their loans month after month.
It's unclear whether the changes offer a long-term solution for the Cincinnati bank, as Fifth Third officials acknowledged Wednesday in discussing fourth-quarter results. For now, the $134 billion-asset bank is only offering the product to existing customers.
Yet to be determined is whether the revised product will comply with new rules on deposit advances, which are expected to be released by the Consumer Financial Protection Bureau later this year.
Ultimately, Fifth Third faces one of three outcomes, Chief Financial Officer Tayfun Tuzun said during a conference call with analysts. Depending on what the CFPB's rules require, the bank will continue offering the product under the current terms, revise it again or stop offering it altogether.
"We still seek to address the needs of those customers," Tuzun said.
Fifth Third spokesman Larry Magnesen said that the bank earned approximately $130 million from deposit advances last year, and that figure is expected to fall to $30 million this year.
"Our customers like this product very much," Magnesen said.
Consumer advocates aren't satisfied with the changes Fifth Third has made, even though the product is more affordable than it used to be.
Paul Leonard, director of the Center for Responsible Lending's office in California, said the loans still feature high interest rates, and the bank makes no evaluation of the borrowers' ability to repay the loan.
"This product still has the same core problems that the other bank payday products had," he said.
Regions, a $119-billion asset bank based in Birmingham, Ala., phased out its deposit advance product in 2014, completing the process in the fourth quarter, according to company spokeswoman Evelyn Mitchell.
Regions has no plans to revive the deposit advance, though the bank has introduced new secured lending products for consumers since the product's discontinuation.
Regions also announced Wednesday that its fourth-quarter revenue was reduced by $8 million as a result of customer reimbursements. The reimbursements were related to a change in how Regions assesses fees on customers who have bounced a check or otherwise been charged for lacking sufficient funds in their accounts.