By: Danielle Douglas
November 24, 2013
The government is imposing tougher restrictions on banks that offer short-term, high-interest loans that have been blamed for trapping some Americans in a cycle of debt.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. on Thursday issued identical guidance to limit the risks of loans tied to consumers' paychecks, government benefits or other income directly deposited into their bank accounts.
Critics say these products carry the same abusive high interest rates and balloon payments as the payday loans offered by storefront and online operators. But industry groups contend that placing strict constraints on banks will only push people with limited access to credit into the arms of less-regulated vendors.
"The OCC encourages banks to offer responsible products that meet the small-dollar credit needs of customers," Comptroller of the Currency Thomas Curry said in a statement. "However, deposit advance products ... pose significant safety and soundness and consumer protection risks."
Curry said the guidance is meant to clarify the agency's expectations for banks to understand and manage those risks. Neither the OCC nor the FDIC will bar banks from deposit-advance loans, but their policies could radically alter the operations of the handful of banks that offer the product.
At least 15 states have already banned the service, while several others have imposed strict laws to limit the interest rates and the number of loans that can be made. Federal regulators are taking cues from state authorities proposing similar limits, including a "cooling-off period" that prevent borrowers from taking more than one deposit advance during a monthly pay cycle.
Another key concern is that banks determine a customer's ability to repay before making a loan, a standard underwriting practice in all other types of lending. Regulators recommended reviewing at least six months of customer's banking activities.
Only six major banks offer direct-deposit loans: Wells Fargo, U.S. Bancorp, Regions Bank, Fifth Third Bank, Guaranty Bank and Bank of Oklahoma. But the scope of Thursday's guidance is limited because Fifth Third and Regions are regulated by the Federal Reserve, which is not participating in the effort. The Fed did warn banks of the consumer risks posed by the products in April, but consumer advocates fear the warning is not enough.
"All banks should take this opportunity to find affordable ways to offer small-dollar loans," said Lauren Saunders, managing attorney at the National Consumer Law Center. "Banks' so-called 'deposit advance' loans are payday loans plain and simple."
Banks market these products, with names such as "Early Access" or "Ready Advance," as short-term solutions for financial emergencies. But borrowers often wind up taking multiple loans that keep them mired in debt.
Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit.
If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, then tacks on overdraft fees and additional interest.
A study from the Consumer Financial Protection Bureau found that more than half of direct-deposit borrowers took out advances totaling $3,000 or more.