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.”
On Wednesday, the bureau issued a report on payday loans and the deposit advances banks offer, noting several problems with the products. Among these was the lack of basic underwriting to determine whether borrowers can actually repay the money.
The median size of individual deposit advances at banks is $180, the agency said in its report, and banks typically charge about $10 per $100 borrowed, which translates into an APR of 304 percent for a 12-day advance. There’s a lot of repeat borrowing.
The Federal Reserve, which didn’t join the guidance, sent a letter and statement via e-mail Thursday to all the banks it supervises, saying the products pose “significant consumer risks.” It encouraged state member banks to find responsible products to meet small-dollar credit needs.
Spokespeople for San Francisco-based Wells Fargo & Co. and U.S. Bank in Minneapolis said staff members were reviewing the guidance and weren’t immediately available for comment.
“Our Checking Account Advance gives customers access to funds for use in case of an emergency, with transparent pricing, as well as limits, safeguards and cooling-off periods built in to help customers avoid becoming overextended,” U.S. Bank spokesman Tom Joyce said in an e-mail.
He said 96 percent of customers who used the service were satisfied.
Making ends meet
David Wagner doesn’t like the loans, but he sees the advances as a last-resort way for him to make ends meet. Potential new restrictions frighten him.
Wagner, 36, who works as a personal care assistant, lives in northeast Minneapolis and said he suffers from cystic fibrosis and other medical issues. He said that he has used the deposit advance loans at U.S. Bank heavily for years and that they are critical to helping him make his government checks cover the necessities.
On Tuesday, he said, the bank cut him off, informing him he couldn’t get more than nine deposit advances in a row.
“I know I’ve gone over nine before and I haven’t had a problem,” he said. “I just don’t know what my family is going to do. We got one bag of food yesterday at the food shelf.”
Nessa Feddis, senior vice president and deputy counsel at the American Bankers Association, said it’s too early to say how the industry will respond. The requirement to state an APR “is not useful to consumers,” she said.
The guidance likely will stamp out any interest banks might have in starting up such products, she said. “It is a real challenge balancing the need for small affordable loans in a convenient manner, and creating a sustainable product.”