The New York Times
By: Jessica Silver-Greenberg
April 25, 2013
Federal regulators on Thursday admonished some of the nation's largest banks for offering payday-style loans, short-term costly credit tied to customers' checking accounts.
The guidance from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation urged the banks, including Wells Fargo and U.S. Bank, to ensure that borrowers can repay the loans, which otherwise can mire customers in debt and result in a slew of fees.
Banks offer the loans linked to checking accounts with the understanding that the lender automatically withdraws the full cost of the loan when it is due. Factoring in fees, the loans, called deposit advances, can come with interest rates that exceed 300 percent.
The moves on Thursday come as state and federal officials ratchet up their efforts to clamp down on payday lending at storefronts and at large banks. Across the nation, 15 states impose strict interest caps on the loans, effectively banishing payday lenders.
On Wednesday, the Consumer Financial Protection Bureau, which has been examining the loans, issued a report that found the payday and direct-deposit loans can quickly morph from short-term credit into a seemingly unending burden for low-income customers. "For too many consumers, payday and deposit advance loans are debt traps," Richard Cordray, the agency's director, said in a statement when the report was issued.
Lawmakers are joining the battle against the high-cost loans. In July, Senator Jeff Merkley, Democrat of Oregon introduced a bill to rein in the payday loans. One critical element of the legislation pending in Congress would force lenders to abide by usury caps in the states where borrowers live rather than where the lenders are based.
The crackdown on payday loans is an issue that has gained urgency after feckless mortgage lending helped hasten the 2008 financial crisis that left millions of homeowners struggling to stave off foreclosure.
In its latest guidance, the comptroller said that it would begin scrutinizing the deposit-advance programs during its routine bank examinations. As part of that oversight, the agency said it would look at whether banks are doing more robust underwriting. Before allowing a customer to borrow against a checking account, banks should consider whether customers have a range of income sources to repay the debt, the comptroller said.
"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 comptroller's guidance said.
To ensure that the loans don't ensnare borrowers in debt,the comptroller said, banks should also monitor how often customers take out the loans. The comptroller also proposed that banks institute more stringent "cooling-off" periods that bar customers from taking out loans in quick succession.
"Deposit advance loans that have been accessed repeatedly or for extended periods of time are evidence of 'churning' and inadequate underwriting," the comptroller noted. Churning, the agency said, resembled "loan flipping" where lenders aggressively encouraged homeowners to refinance their mortgages--a practice that generated rich fee income for the banks but little benefit for homeowners.
Alongside the guidance, the comptroller included a scathing assessment of the loans and warned banks that the loans could pose "reputational risk."
Last May, the F.D.I.C. said the agency was "deeply concerned" about payday lending. The comptroller's office said in June 2011 that the loans increased "operational and credit risks and supervisory concerns."
The Federal Reserve issued guidance as well on Thursday, though it was notably gentler with the banks. While the agency did issue a three-page letter to banks that said the deposit loans could precipitate "consumer harm," the agencies guidance lacked the specificity of that of the comptroller.
For low-income consumers, the loans can result in a wave of overdraft charges and fees for borrowers already in a precarious financial position. Borrowers who take out payday loans are roughly two times as likely to be hit with overdraft fees, according to a March report by the Center for Responsible Lending, an advocacy group.