By: Vicki Needham
April 28, 2013
A leading banking group says tighter guidelines on deposit advance loans could push consumers into higher-risk payday credit.
Facing stricter guidelines from federal regulators on short-term, small-amount loans, banks will have to determine if it is worth continuing to offer the products if they become too expensive.
"The problem with guidance that is too restrictive is it can push folks into payday lending that is more expensive, has less controls and is not good for consumers," said David Pommerehn, counsel for legislative and regulatory affairs at the Consumers Bankers Association.
"It might have unintended consequences."
The deposit advance loans, which have been on the market for around 10 years, have come under more scrutiny lately with the proliferation of payday loans and a rapidly growing number of problems those lenders.
"We want to caution federal regulators not jump too soon into anything that could make it too difficult to meet the need for short-term, small-dollar liquidity," Pommerehn said.
He said deposit advance loans are offered at a cheaper rate than payday credit, require heavy disclosure and compliance with federal law, and, generally, have received positive feedback from borrowers.
Products are designed for customers who already have deposit accounts at the bank that is providing the loans, which average $180, he said.
He said there is a limit of around $500 and that it is in the "bank's best interest" to maintain a strong relationship with the customer.
Banks are protective of their customer relationships and don't want to be "one and done."
"These products not for mass consumption," he said.
Pommerehn, who said only six banks are affected by the new restrictions, said bankers are working with regulators to make sure that the products are "viably offered without overly restrictive guidelines."
He doesn't think that the increased regulations will "kill the product."
In the past few years, lawmakers have put forward a litany of complaints about banks and lenders of money they deem dangerous to consumers.
After years of plugging along on that front, federal regulators finally took what lawmakers consider the first of many steps to constrain what they deem predatory lending.
The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) offered guidance on Thursday that urged the banks, such as Wells Fargo, to better weigh the ability of consumers to repay the loans and to ensure borrowers don't get caught in a cycle of debt by taking out loans to pay for previous liability.
"Failure to consider whether the income sources are adequate to repay the debt while covering typical living expenses, other debt payments, and the borrower's credit history presents safety and soundness risks," the OCC's guidance said.
The two agencies said that banks must evaluate a borrower's income, and every borrower must be reevaluated every six months and turned downed for a loan if they have not fulfilled the terms.
Banks also should monitor how often customers take out the loans and add stricter "cooling-off" periods that prohibit them from borrowing in quick succession, the guidance said.
That includes limiting loans to one per month.
Some banks already use cooling-off periods, but the agencies said that there are too many ways to get around the limit.
"Deposit advance loans that have been accessed repeatedly or for extended periods of time are evidence of 'churning' and inadequate underwriting," the OCC said.
On Wednesday, a report from the Consumer Financial Protection Bureau (CFPB) found the payday and deposit advance loans, with their loose lending standards, high costs and risky loan structures, can quickly lead to further indebtedness.
"This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden," said CFPB Director Richard Cordray.
"For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates."
Senate Majority Whip Dick Durbin (D-Ill.) recently introduced a bill that would create an interest rate and fee cap of 36 percent for all consumer credit transactions, in an effort to end rates that can skyrocket up to 300 percent.
There is a variety of similar legislation on the House side to address a growing number of issues.