New York Times
By: The Editorial Board
January 23, 2014
Rules issued in November to stop banks from emulating predatory payday lenders have yielded promising results. The rules, issued by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, have led several banks to discontinue "deposit advance" loans that are specifically designed to trap people in debt. But consumers will remain vulnerable to versions of the debt trap until another agency, the Consumer Financial Protection Bureau, issues rules of its own to protect consumers of small loans from excessive and unaffordable costs.
Payday lenders attract customers by promising small loans that can easily be repaid on the borrower's next payday -- customarily in two weeks. Unfortunately, most borrowers are unable to repay on the agreed date and end up borrowing again and again, at ruinously high interest rates. Deposit advance loans work the same way, except the bank repays itself from an electronic deposit that comes into the borrowers account.
The rules from the F.D.I.C. and the O.C.C. attacked this vicious cycle by requiring the banks to determine if the borrowers could pay their debts, limited them to one loan per monthly statement cycle and said they could not grant a new loan until the previous one was paid off. Several big banks have since announced that they are getting out of the deposit advance business.
But new forms of exploitation will invariably arise unless the Consumer Financial Protection Bureau writes broad affordability rules of its own. These rules, suggested by The Pew Charitable Trusts' Safe Small-Dollar Loans Research Project, would limit monthly loan payments to 5 percent of the borrowers' pretax income, spread the costs of fees and interest over the life of the loan and require clear disclosure of all costs. Rules like these will give unsuspecting borrowers even more protection from being ambushed by debt.