WASHINGTON — Two federal regulators issued guidance Thursday on deposit-advance products that establish strict underwriting standards for payday loans offered by banks and any related third-party vendor.
The guidance requires banks to review a borrower's future payment ability for short-term loans, often called payday loans. Regulators argue these short-term loans typically have higher fees and can cause borrowers to repeatedly overdraw their account.
"We have significant concerns regarding the misuse of deposit advance products," said Comptroller of the Currency Thomas J. Curry, in a press release. "The guidance today is an important step toward better protecting consumers and enhancing the safety and soundness of national banks and federal savings associations that may be offering similar products."
The guidelines were separately released by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., but their requirements were substantially the same. The Federal Reserve Board has not issued similar guidance, a decision that has drawn criticism (http://www.americanbanker.com/issues/178_79/fed-faces-flak-over-bank-payday-loans-1058610-1.html) from consumer groups.
The OCC said it "will closely review the activities of banks" that have or will offer deposit advance products by examining the bank as well as any third party assisting the institution, particularly if the vendor gets a portion of the fees.
"The existence of third-party arrangements may, when not properly managed, significantly increase institutions' legal, operational and reputational risks," the OCC said.
Regulators are advising banks to seek legal counsel in making sure such products are in compliance with consumer protection and fair lending laws.
Regulators are also looking at whether banks are repeatedly offering payday loans for extended periods of time to the same borrower, known as "churning," which they consider a sign of "inadequate underwriting."
Banks cannot offer more than one payday loan at a time and no more than one loan per monthly statement cycle, according to the guidance. Also, the bank cannot increase the amount due without a full re-assessment of underwriting standards.
The OCC said banks must evaluate the customer's income level as well as inflows and outflows of their deposit account for at least six months before underwriting a short-term credit. It must also reevaluate the borrower every six months. Delinquent or adverse borrowers are not eligible for an advance.
The Consumer Financial Protection Bureau issued a separate statement to support the guidance, saying it was based on the "same concerns motivating the CFPB's ongoing work in this area."
"The CFPB believes deposit advance products as currently structured raise serious consumer protection concerns related to the sustained use of a high-cost product," the agency said.
The OCC previously proposed guidance on deposit-related consumer credit products in June 2011 but it has now withdrawn that proposal. The public has 30 days to comment on the new guidance once it's filed in the Federal Register next week.