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Regulators scare off predatory lending by big banks

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Four big banks will be scraping their payday-like loan instruments.

According to CNN Money which was published on Jan. 21, Federal regulators in the United States recently warned federally regulated banks that they would be examining their short-term loan business to determine if they violate consumer protection laws. After the announcement, several big banks stated they would be exiting the loan vehicles, which are similar to payday loans in that they carry extraordinarily high interest rates.

When calculated on an annualized basis, these small dollar, typically short-term loans often carry triple-digit interest rates. In most cases, they are automatically repaid from a customer's checking account each payday. Big banks say the loans provide an emergency line of credit to customers when they cannot qualify for a traditional loan. Nevertheless, Regions, U.S. Bank, Fifth Third and Wells Fargo announced last week that the so-called deposit advance products would be discontinued.

"The Consumer Federation of America (CFA) applauds the elimination of these products, which harm consumers through high rates and an insufficient consideration of borrowers' ability to repay without additional borrowing. This is a very positive step for consumers," said Tom Feltner, director of financial services at CFA, in a prepared statement.

Other consumer advocates such as the Center for Responsible Lending have called on federal regulators to ban the products, labeling them “predatory.” The Center for Responsible Lending compiled a report that states the loans carry steep fees, which prevent the borrower from being able to repay the loan on time.

Although the average term of the loan is 10 days, the borrower is forced to renew the existing loan or take out a new one, creating a vicious cycle. The report found that customers remained stuck in the loan cycle on average 175 days per year. With a fee of $10 per $100 borrowed the interest on the loan amounts to 365% APR.

The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a warning to banks in November of last year. A borrower's ability to repay needs to be taken into consideration when issuing these loans and the small-dollar loans need to be affordable, the two agencies said somewhat vaguely.

The regulating agencies also said they would be examining the banks' products to ensure the products meet these requirements. Rather than face additional federal scrutiny, several banks will be scrapping the loans completely.

Regions’ Ready Advance product will be discontinued on Jan. 22 and they are developing a transition plan for existing customers. U.S. Bank is ending its deposit advance program on Jan. 31 and will clear existing loans by May 30. Wells Fargo said existing customers will only be able to get loans until the middle of the year and Fifth Third Bank will end the service on Jan. 31, with plans to wind down the program by the end of this year.

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