Agencies want banks to disclose a clear interest rate and analyze a borrower’s ability to repay.
Federal regulators on Thursday clamped down on the deposit advances banks offer, a first step in what’s expected to be a broader crackdown on the country’s multibillion-dollar payday loan industry.
Although most people associate high-interest, fast-cash payday loans with check-cashing shops on the street or online, a handful of commercial banks, notably Wells Fargo & Co. and U.S. Bancorp, offer similar advances. The loans are pitched to people with existing accounts as a handy help for financial emergencies and a way to avoid overdrafts.
Consumer advocates have protested the bank products as no different from the payday loans on the street, which they view as predatory products that catch vulnerable consumers in a churn of repeat borrowing that’s tough to break.
On Thursday, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) issued a 21-page guidance scolding banks for the expensive loans. They’re seeking to rein in the products and ensure that banks assess borrowers’ ability to pay back the money.
FDIC Chairman Martin Gruenberg said in a statement that the proposal “reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers.”
Payday loan borrowers run up about $7.4 billion annually at 20,000 storefronts and hundreds of websites, plus unknown additional sums at a growing number of banks, according to the Pew Charitable Trusts.
About 15 states effectively ban payday lending by nonbanks, but commercial banks have been largely free to pursue the product. Minnesota permits payday loans but has imposed restrictions, and Attorney General Lori Swanson has been suing online payday lenders.
Relatively few commercial banks offer the products, but more have been eyeing them as they seek new revenue sources.
Thursday’s guidance highlights several federal laws and regulations already governing the deposit advance loans and gives banks a stern warning to comply. It also pushes further, requiring banks to clearly disclose the loans’ costs in terms of an annual percentage rate (APR) and to develop specific board-approved policies on underwriting deposit advance loans.
Among the requirements, banks would have to use adequate underwriting to determine whether a borrower has enough income to repay the loan without getting another one. There would need to be a cooling-off period of at least one monthly statement cycle between loans.
Banks also would need to repeat the underwriting before raising credit limits and re-evaluate eligibility at least every six months.
The guidance isn’t final, and the public has 30 days to comment.
More than a dozen groups including the National Consumer Law Center and the NAACP issued a statement saying they applaud the move. Requiring banks to consider a borrower’s ability to repay is “just common sense,” they said.
“It is also a fair directive, since banks have received generous government support and currently borrow money themselves from the government at close to zero percent interest,” the group said in a statement.
Nick Bourke, project director at the Pew Charitable Trusts, said the guidance was strong and, if adopted and enforced, would have an impact. “This guidance will probably lead to the elimination of payday loans at banks,” Bourke said.
The Consumer Financial Protection Bureau, which supervises nonbank payday lenders and some banks, said it supports the guidance and is still studying the products and will use its authority to address what it has found to be “serious consumer protection concerns related to the sustained use of a high-cost product.”