Regulatory guidance finalized in November has created a tough choice for banks providing short-term credit in the form of deposit advances: either rework the model so these small-dollar loans stay profitable while complying with the new rules, or get out of the business.

Four banks, including Wells Fargo and U.S. Bancorp, face this choice right away, while others will be watching closely to see if these institutions are successful in devising a new formula for the product.

Banks offering deposit advances typically charged a $1.50 to $2 fee for every $20 borrowed, with the repayment often coming out of the borrower's next direct deposit check. Much like in the payday loan industry, borrowers frequently would roll over their loans into new ones, a debt cycle that elicits harsh criticism from consumer advocates.

But guidance from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency requires banks to evaluate borrowers' ability to repay without a rollover. And every six months, banks will be required to reevaluate their customers' eligibility, looking at factors such as their total credit obligations and how frequently they overdraw their checking accounts.

On top of that, after the borrower repays the loan, banks will have to allow at least one statement cycle to elapse before offering another loan. This cooling-off period is expected to sharply cut into banks' revenue from the products, by as much as 90 percent, according to an estimate from the consulting firm Novantas.

In a comment letter filed with regulators before the guidance was finalized, Wells Fargo said that it had "several hundred thousand customers" for its deposit advance service and would "be forced to discontinue" the service if the new rules took effect. And U.S. Bancorp noted in its comment letter that more than 90 percent of its deposit advance users would be disqualified by the guidance.

But Hank Israel, a Novantas managing director, says banks would be wise to find a way to stay in the business because of the strong consumer demand for small-dollar loans. "Redesigning these programs probably makes sense," he says.

BOK Financial in Tulsa, Okla., and Milwaukee-based Guaranty Bank also are subject to the new provisions and were reviewing them at press time. Two other providers of deposit advances, Regions Financial and Fifth Third Bancorp, are not subject to the guidance because they are regulated by the Federal Reserve Board, which declined to sign on to the document.

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