Regions Exits Deposit Advance Market
Wells Fargo and U.S. Bank are among the institutions still offering the controversial loan product in the face of tough guidance that took effect in November.January 3
The short-term consumer loan product will either have to be overhauled or ditched in the wake of new regulatory guidance.November 26
Regions Financial (RF) is discontinuing its controversial short-term consumer loan product, the company announced Wednesday.
Birmingham, Ala.-based Regions is the first of six U.S. banks that offer so-called deposit advances to pull out of the marketplace. The bank said that it will offer a new secured loan to consumers who want to borrow as little as $250. It is also developing an unsecured line of credit for cash-strapped consumers.
The decision comes as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are telling banks that they regulate to either discontinue the product or give it a fundamental overhaul.
Regions, however, is not regulated by the OCC or the FDIC, so the new guidance from those two agencies does not apply to the Regions product, which it calls "Ready Advance." Other banks that are regulated by the two agencies, including Wells Fargo (WFC) and U.S. Bancorp (USB), have been scrambling since late November to make a decision on the fate of their short-term loan offerings.
Still, the writing is on the wall: the Consumer Financial Protection Bureau is expected to write rules later this year that would apply to all banks. And the Ready Advance product has become a public-relations headache for Regions. In November, community groups held demonstrations outside several Regions offices in protest of the product.
"We deserve better than to be swindled at our neighborhood bank," Cherie Mortice, a board member at Iowa Citizens for Community Improvement, was quoted saying at the time.
In a news release Wednesday, Regions made clear that it does not intend to exit the short-term consumer loan market.
"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, said in the news release.
In a recent interview with American Banker, Bill Simpson, Regions' product manager for a suite of products aimed at so-called underbanked consumers, said that his company sees strong growth potential in that market segment.
The secured line of credit that Regions will offer doesn't figure to attract a wide swath of its existing Ready Advance customer base. That's because consumers who turn to deposit advances and payday loans generally don't have enough cash to make immediate purchases.
The secured loan from Regions will offer $250 to the borrower only if that loan is secured by at least $250 in a savings account, or more money in a certificate of deposit.
Regions said in its press release that the unsecured line of credit it is developing will meet the needs of a broader customer base. Reaching a large segment of consumers while also complying with new regulatory edicts could be a challenge, according to market observers.
The $117 billion-asset Regions plans to stop accepting new Ready Advance customers on Jan. 22, and says it will stop offering the product altogether by the end of the year. The company is developing a transition plan for its existing customers.
Richard Hunt, president and chief executive officer of the Consumer Bankers Association, said Wednesday that regulators are discouraging banks from serving customers in need.
"The vast majority of consumers using deposit advance products do so responsibly under transparent and fully disclosed terms," Hunt said. "Forcing banks out of this business limits options for consumers and pushes them towards payday lenders and fly-by night entities."