WASHINGTON State and federal regulators said Wednesday they would consider additional restrictions on deposit advance products in the face of concerns from lawmakers about the effects of products that resemble payday loans.
The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued guidance in late April requiring providers to verify a borrower's ability to repay before offering short-term deposit advance products that many say are being overused by customers. But lawmakers have pushed for stronger measures, and for more regulators to get in the act.
"While everyone agrees payday lending and deposit-advance products are many times necessary, they are expensive forms of short term credit and borrowing," said Sen. Bill Nelson, R-Fla., chairman of the Senate Special Committee on Aging. "We must ensure that they are properly overseen with adequate consumer protections and safeguards against predatory lending."
Testifying at the hearing, representatives from the FDIC, the Consumer Financial Protection Bureau and a Maine regulator said they would consider requiring clearer disclosures on payday loan-type products. One option is to require financial institutions to disclose a simple bottom-line amount that a borrower would have to pay over the entire term of a product.
"There is room for improvement in disclosure" so "the consumer has a better understanding of what he or she is really getting into," said Eric Wright, staff attorney for the Maine Bureau of Consumer Credit Protection.
Wright even agreed with lawmakers that regulators should impose a cap on interest rates for such products. He noted a case he has dealt with in which a payday lender charged a 469% interest rate on a $500 loan after it was past due.
"The reality is that the true cost of that $500 loan calculated by that APR is over $2,300," he said.
Nelson said agencies could consider a cap similar to the 36% interest rate limit that lawmakers mandated years for credit products sold to members of the military.
But David Silberman, the CFPB's associate director of research, markets and regulations, said such a cap could not be enforced without legislation.
Still, Silberman noted, the Dodd-Frank Act does grant the new federal bureau considerable leeway to regulate products such as deposit advance.
"We have large authority and we will use that authority to the full extent that we can," he said.
Mark Pearce, director of the FDIC's division of depositor and consumer protection, said while the federal ceiling on interest rates charged to members of the military "is somewhat unique," regulators can still "take some action to address some of the problems with the product."
"We do have authority to require institutions to operate in safe and sound manner and make loans with prudent underwriting and we're currently working with that," Pearce said.
The guidelines issued in April by the FDIC and the OCC drew some criticism directed at both the CFPB and the Federal Reserve Board for not following suit. Instead, the consumer bureau released a report that same week cautioning participants about the risks from certain payday-type products, and the Fed issued its own advisory note with similar warnings.
Members of the committee said additional regulations were needed to keep pace with the growth of new distribution models for payday loan-type products.
"I understand that online payday loans don't make up a majority of payday loan volume nationally but I will predict right now that it will continue to grow and may eventually overtake store front lending," said the committee's ranking member, Sen. Susan Collins, R-Maine.
Silberman assured lawmakers that online payday lenders as well as third parties that generate leads for payday lenders are of keen interest to the CFPB.
"These are all serious risks that we need to be addressing in as comprehensive a way as we can," he said.
But he did not commit to specific rulemaking or a timeline on any further actions.
"You point to a large concern that we have about the online payday space," Silberman said in response to Collins. "It was not the subject of our study but something we very much want to study."