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Regulators to Crack Down on Bank Payday Loans

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. will soon impose strict limits on so-called deposit-advance loans, according to people familiar with the regulators' plans.

Among the regulators' intended mandates are a month-long "cooling-off period" between the repayment of one loan and the issuance of another and a requirement that banks underwrite the product. Those changes could force FDIC- and OCC-regulated banks offering the small-dollar loans, which are similar to payday loans offered by nonbanks, to either dramatically change their products or drop them entirely.

Meanwhile, the Consumer Financial Protection Bureau is considering a crackdown of its own. The agency released a report released Wednesday that drew strong parallels between traditional storefront payday loans and the deposit-advance loans offered by banks, and hinted at reforms that would affect banks and nonbanks alike.

The OCC guidance "is roughly patterned on payday loan guidance that had the effect of becoming extremely restrictive," said someone familiar with the OCC proposal. "The OCC will closely review the activities of banks that offer or propose to offer deposit advance products."

The OCC and FDIC guidance will be separate but highly similar, according to someone familiar with both versions. Both are expected to be released Thursday. A spokeswoman for the FDIC declined to confirm or comment on its plans.

Notably, the Federal Reserve — which regulates Regions Financial (RF) and Fifth Third Bancorp (FITB), two major state-chartered lenders in the deposit advance lending business — will not be joining its fellow regulators, according to people familiar with the FDIC and OCC plans. The regulator did not immediately respond to a request for comment.

Other banks that offer deposit advance loans include Wells Fargo (WFC) and U.S. Bancorp (USB). Both of those companies' bank units are regulated by the OCC.

Among the most significant language in the proposed OCC guidance will be a requirement that banks consider "borrowers' financial capacity" to repay such deposit advance loans. That appears to be synonymous with the consumer advocates' demand that banks consider whether deposit advance borrowers have an ability to repay their debts rather than simply rolling them into future obligations.

In keeping with that requirement, the regulators will also require that the short-term loans be paid back in full before any new credit is offered. Consumers would then need to wait a month before taking out a new deposit advance loan, thereby limiting the number of loans that any one borrower can take out to six a year.

The expected guidance would be a significant victory for consumer advocacy groups that have assailed deposit-advance products as abusive. By repeatedly offering small-dollar credit to people who are living paycheck to paycheck, such industry critics argue, banks only worsen their customers' financial troubles.

"Banks never should have been in the payday loan business, and we support the OCC in ensuring what should have been obvious — that loans should not be paid to consumers that can't repay them," says Lauren Saunders, an attorney for the National Consumer Law Center. "We are happy the OCC is addressing those problems."

Such arguments have gained traction over the last few years in the consumer financial product regulatory arena, said Kathleen Day, a spokeswoman for the Center for Responsible Lending. Both the CARD Act and Dodd-Frank Act enshrined the ability to repay as a requirement for credit cards and mortgages.

"Assessing a person's ability to repay a loan is essential for any lending product. It's basic banking," says Day. "We haven't seen [the OCC and FDIC proposed guidance] yet, but if true, we hope the Fed takes similar action on bank payday loans and that CFPB takes similar action on all payday loans."

Regulators are also getting pressure from some Democrats on Capitol Hill. In January, five Senate Democrats urged the FDIC, the OCC and the Fed to stop such loans, calling them unsafe and unsound.

The guidance expected from the OCC dovetails with the CFPB's findings in a new 45-page report. Consumers use traditional payday loans in much the same way they use deposit-advance loans, according to that report, and both products often become debt traps.

The report found that two-thirds of payday borrowers that were studied had at least seven loans in a year. Meanwhile, more than half of deposit advance borrowers in the study took out loans totaling more than $3,000, and those borrowers tended to be in debt for more than 40% of the year, according to the CFPB report.

"What we found is there is not much difference, from the consumer's perspective, between payday loans and deposit-advance loans," CFPB Director Richard Cordray said during a conference call announcing the report's findings.

The CFPB study hints at support for the kinds of potential reforms that are expected to be proposed Thursday by the OCC and FDIC.

For example, the CFPB report states that consumers' sustained use of payday loans and deposit advances may result in part from a lack of good underwriting.


(6) Comments



Comments (6)
Astounding to watch the OCC and FDIC talk tough about payday loans, yet they deliberately ignore the regulatory discrimination that allows bank Overdraft programs to hide under Reg DD (Truth in Savings) so that they won't have to divulge APRs of 2,000% or more.
Posted by jim_wells | Wednesday, April 24 2013 at 4:51PM ET
I suppose teaching us Americans not to spend what we don't have would be out of the question hu? Once again, our inability to hold people accountable for their own financial practices makes the banks the policemen of the world. Just like the whole overdraft program debate - if people would not overdraw their accounts no need for the debate. Same thing here.
Posted by tvallie | Wednesday, April 24 2013 at 11:01AM ET
Regulators also need to crackdown on the backdoor agreements banks have with the big interest lenders, giving them access to depositor accounts. The payday/big interest lender (like CashCall and Western Sky) get to empty out the account while the banks reap non-stop overdraft fees. This activity has been reported by American Banker in several outstanding articles. Big banks lament how small deposit accounts fall victim to such lenders, but give payday/big interest lenders the ability to keep their victims in that vicious circle.

But banks should be the ones making such small, emergency loans so that some sort of reliable, uniform protections are there for the consumer.
Posted by RSE Journal | Wednesday, April 24 2013 at 7:01AM ET
Pigs get greedy and Hogs get slaughtered!!!
Those banks were making over 1000% Return on Equity after a 31% tax rate! John Stumph (Wells Fargo) and Richard Davis (US Bank) would never deny that fact when I confronted their bank boards with the facts. But it was worse for the retail banking industry because they were tarred and feathered for the actions of those 4 banks. Those banks could have easily modified what they were doing and had a product that could be "occasionally" OK for the public, meet their ROE goals for product profitability, and be regulatory acceptable; BUT, HOGS GET SLAUGHTERED!!
Posted by FrankRauscher | Wednesday, April 24 2013 at 7:00AM ET
The banks offering payday loan styled products have virtually zero risk. They provide these products to their "captured" customers having a bank account with the bank and direct deposit of their payroll proceeds.

Banks simply cannot profitably offer small dollar loans at $10 fees per $100 loaned AND perform "ability to pay" calculations.

Payday loan lenders will certainly welcome less competition but the continued scrutiny of our product by the Fed's is disheartening. Big brother knows what's best for all of us.
Jer - Trihouse (Yes, I'm biased.)
Posted by Jer - Trihouse Consulting | Tuesday, April 23 2013 at 11:50PM ET
Completely absurd on the part of the regulators! do they think that because they"outlaw" pay day advances or make them so difficult to get that that the demand will drop? utterly ridiculous, typical closed mind bureaucratic thinking.
All they will succeed in doing is push the folks that want the loan into the arms of pay day loan companies (official or unofficial).
The reality is that banks should be the ones to make these loans, they are the ones that are under regulatory supervision for gods sake! who is regulating the pawn shop down the road that is doing unofficial loans at 3000% or the check cashing store that is doing pay day advance as a side line? Nobody. The victim in this debacle continues to be the working stiff that is trying to get he and his family through the month.
Posted by cstar | Tuesday, April 23 2013 at 3:21PM ET
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