New York Times
By: The Editorial Board
December 2, 2013
Last month, banking regulators put the finishing touches on rules designed to rein in short-term consumer loans from banks that are as dangerous to consumers as the predatory loans made by so-called payday lenders.
Payday lenders have notoriously marketed themselves as a harmless option for people who need small loans they hope to repay quickly, usually in two weeks. In truth, the industry earns considerable profits from borrowers who cannot afford to repay the original loan as agreed and must renew the loan again and again for an average fee of about $50 each time. These borrowers end up in debt for months, saddled with loans that can carry an interest rate of 400 percent or more.
The banking industry, which cannot resist such easy profits, offers "deposit advance" loans that work the same way. There is no fixed date for repayment, but the bank repays itself from an electronic deposit that comes into the borrower's account. A study earlier this year from the Consumer Financial Protection Bureau found that these transactions were eating customers alive. Overdraft fees drain the borrower's account, forcing him or her to borrow again and again. Moreover, three-quarters of the loan fees came from consumers who borrowed more than 10 times within 12 months.
New guidelines issued by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency for banks they oversee stop short of completely disallowing deposit advances. But the guidelines should reduce the banks' profits while making the loans less onerous to borrowers. Banks will have to determine if the borrower has the ability to repay without having to borrow over and over again to meet expenses.
Banks will also be barred from making more than one loan per monthly statement cycle, and from extending a new loan before the previous one has been repaid in full. In addition, the banks will have to furnish the borrower with clear and accurate disclosure of terms.
The Federal Reserve, which oversees other banks that practice this brand of lending, cautioned those banks earlier this year about risks posed by those loans. But it did not issue rules to make them less onerous. It should do so now, following the example set by fellow regulators.