Eliminating Deposit Advances Forces Consumers Into Costlier Products
New Report Examines Consequences of Restricting Credit Options and of Uneven Regulations
A new report from Bretton Woods, Inc., a financial services consultancy and research firm, finds that recent regulatory guidelines eliminating deposit advance products unnecessarily constrict the small-dollar credit marketplace, push borrowers to other less optimal products and create an unequal regulatory playing field that discourages competition. Consumers will face higher costs for borrowing similar amounts and a less transparent and competitive marketplace.
Restricting Access to Credit Forces Consumers into Costlier Options
Following guidelines issued by the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), all six banks that offered deposit advance products announced that they would no longer offer the short-term, small-dollar credit option despite consumers’ overwhelming demand.
A number of government and industry officials maintain that deposit advances, overdraft protection and payday loans are used interchangeably. Eliminating deposit advances will invariably force consumers to other costlier alternatives. For example, borrowing $300 costs an average of $30 using a deposit advance, $56.70 using a payday lender, and $122.50 through an overdraft protection program – over four times as much as a bank deposit advance. With consumers’ options restricted by regulations, the report found that most will turn to overdrafts because:
- Overdraft programs are available at the banks that have stopped offering deposit advance loans; and
- Payday loans are restricted in many states where consumers use deposit advance products.
Unequal Regulations of Substitute Products Leads to Loss of Competition, Higher Prices
Despite the similarities, each product is regulated differently. Regulating overdrafts as a fee based product versus deposit advance and payday loans as credit products with APR disclosure requirements has created an imbalance in terms of fair and clear disclosures for the consumer to make informed decisions. According the report:
“Any review of these products should be done in a holistic manner because of the demonstrated relationships among these three products. Given this relationship, consistent regulation and disclosures would help consumers make better informed decisions and choose the product best suited for their specific needs.”
There are legitimate uses for overdraft protection, deposit advance and payday loans. Inhibiting use of any of these, as the FDIC and OCC guidance did to deposit advances, will force consumers into costlier and less transparent products that often do not fit their specific needs.