Courtesy of Jeremy Paige / unsplash.com
Everyone remembers deposit advances – they were sort of payday loans but slightly safer, somewhat nicer. Right? Wells Fargo and a range of other banks offered them a while ago – these small-dollar loans were also meant for emergency situations and had quite considerable interest rates.
Then, in 2014 policymakers introduced pretty restrictive guidelines to the industry and banks stopped issuing such loans – for good (or so it seemed.)
Now deposit advances might come back, especially in the light of the changes taking place in the Consumer Financial Protection Bureau (CFPB), or they will not – due to the recent payday loan rule, the making of the same CFPB.
Why the bother?
In fact, these two products are pretty much the same. They are small cash short-term emergency loans that are offered under pretty considerable interest. However, there is a difference.
Deposit advances were offered by banks and solely to the existing customers; thus, there was no actual need for a credit check each time a borrower applied, and there was also an additional share of safety in the procedure – less risk involved. Such advances were pretty popular and now it is clear why.
Surely, small cash loan industry opponents do see deposit advances and payday loans as pretty much the same thing; they tend to avoid noticing the differences and only focus on the triple-digit interest rates of the latter. However, both caused many borrowers appearing in the same debt situation again and again.
In accordance with the recent news the restrictive guidance on deposit advances has been removed, the step was justified by the Office of the Comptroller of the Currency (OCC) by its conflict with a payday lending rule.
Now that the OCC’s guidelines are about to be gone, it seems that banks will be willing to start offering deposit advances again. However, it is not clear yet how things will go on. The new payday lending rule from the CFPB comes into effect in 2019, and a great number of things still stay unclear.
Many banks won’t find it worth the bother to try and introduce the platform for such deposits for such a short term, when they will have to terminate it in about a year. Those, however, with the platforms at hand, may have a try.
At the moment, however, it makes little sense to expect any changes from either Wells Fargo, Bank of Oklahoma or Regions Bank; and Fifth Third Bank is weighting its options.
So, no alternative after all?
It looks like it’s a bit early to consider deposit advances as an emergency cash alternative in the nearest future. Too much is going on the industry regulation.
Payday loans stay among the most popular and accessible options for many and for now. And despite all the more restrictive legislation and the new rule, people choose them above other options – even when they have access to credit cards and other traditional loan options.
Surprising, isn’t it. Well, not so much, if you think about it.
Numerous researches and statistic reports can now be found about payday loans and the reasons why people are drawn to them. Apart from the sheer necessity there are also other less obvious facts. The laws of decision-making are still being studied and new ideas are being formed. One of the reasons why people do choose payday loans and will go on doing so is a bias towards optimism (according to Marianne Bertrand and Adair Morse), on the one hand.
On the other hand, all these people heading to a payday loan store appear to be pretty much aware of the pros and cons of the deal and are quite accurate in the assessment of their risks and chances (according to Ronald Mann from Columbia Law School.) His idea is that despite the interest rates being so high, payday loans are still being considered as something temporary and unlikely to grow exponentially, there is no risk of long-term involvement.
Thus, it feels much better (on every level) than the option of a credit card loan (provided that it is accessible at all.)
Taking into consideration the fact that small cash loans are a life-saver for many communities, deposit advances may have become another. But in the light of the recent events as well as the new payday lending rule, “the regulator pushes that borrower out of the payday market, the regulator might well be pushing the borrower into borrowing in a more open-ended (and potentially riskier) credit card transaction,” – suggests Ronald Mann.
It stays to wait and see if he’s right.