Banks offering deposit advances or considering it, take note. The Consumer Financial Protection Bureau sees deposit advances as functionally equivalent to payday loans.
The bureau said the report shows payday loans and deposit advances are used by consumers to meet shortfalls in income. Both products have the same three features: small-dollar amounts; they have quick repayment terms, and they require repayment in full or access to repayment through a claim on the borrower’s deposit account.
The median term for payday loans and deposit advances are essentially the same, the bureau said. The median payday loan must be repaid in 14 days, just two days longer than the median duration of deposit advance which is 12 days.
These products also have similar costs to the consumer, the CFPB said. A payday loan has storefront fees between $10 and $20 per $100 borrowed. Deposit advance fees are about $10 per $100 borrowed.
Payday loans and deposit advances also have the feature of “sustained use,” the CPFB said.
Almost half of the payday borrowers the bureau reviewed in the study had more than 10 transactions a year and 14 percent took out 20 or more transactions per year. For the majority of payday borrowers, new loans are most frequently taken on the same day a previous loan is closed, or shortly thereafter, the bureau said.
More than half of all deposit advance borrowers took out more than $3,000 per year and 14 percent borrowed more than $9,000 per year. These borrowers typically have an outstanding balance for at least nine months of the year. “While these products are sometimes described as a way to avoid the high cost of overdraft fees, 65 percent of deposit advance users incur such fees,” the bureau said. “The heaviest deposit advance borrowers accrue the most overdraft fees.”
The CFPB’s findings spurred the FDIC and the Office of the Comptroller of the Currency to issue a supervisory statement that “deposit advance loans share a number of characteristics seen in traditional payday loans… as such, banks need to be aware that deposit advance loans can pose safety and soundness, compliance, and consumer protection risks.”
The Board of Governors of the Federal Reserve System also issued a statement to emphasize to state member banks their shared concern of the consumer risks associated with deposit advance products.