U.S. Bank and Wells Fargo are phasing out a controversial short-term loan program that allows customers to receive advances on direct-deposit paychecks.
Federal regulators advised the two banks to drop them, saying that the "deposit advance products pose a variety of credit, reputation, operational, and compliance risks to banks."
As the short-term loans could carry high financing costs, consumer advocates consider them predatory "payday loans."
"These are high-cost, unsustainable loans made to consumers," said Ed Mierzwinski, consumer program director for U.S. PIRG, a federation of state Public Interest Research Groups. "And the bank can compete with the store-front payday lender very easily because the bank has the right to take the money right out of your account as soon as any more money gets put in your account."
U.S. Bank and Wells Fargo, the two biggest banks making the loans, will stop offering the service to new customers by early February. Their existing customers can still access the service until about mid-year.
"We recognize our customers' need for short-term, small dollar credit," U.S. Bank's vice chair of consumer banking sales and support Kent Stone, said in a statement.
Wells Fargo's statement indicates the company still "offers a spectrum of credit products that are designed to meet customer needs."