WASHINGTON Federal regulators on Monday warned banks and thrifts about the dangers of partnerships with companies selling short-term, low-balance credit products.
Vendors of these products, which include payday loans, are often attempting to skirt state and local consumer protection laws through marketing deals with banks and thrifts, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint statement.
We urge national banks and thrifts to think carefully about the risks involved in such relationships, which can pose not only safety and soundness threats, but also compliance and reputation risks, Comptroller John D. Hawke Jr. and OTS Director Ellen Seidman said in the statement. We intend to scrutinize any such arrangements and to use our supervisory authority to examine the operations of vendors who act as service providers to national banks and thrifts that are sought out to deliver such products.
Payday loans are small, short-term loans that borrowers promise to repay out of their next paycheck or deposit of funds. The Comptrollers Office noted that they tend to have high fees and be renewed frequently.
The payday loan business has grown dramatically in the past few years. Approximately 8,000 companies will make loans totaling $9.2 billion in the category this year, and the market is expected to grow to $20 billion by 2004, analysts said.
The agencies also singled out so-called title loans, short-term loans with extremely high interest rates that are secured by liens on a borrowers title to an automobile. The agencies said many vendors of these products are abusive.
Also on Monday, the Comptrollers Office released for comment a proposal to let the agency increase exam costs on banks that strike partnerships with payday or title lenders. The OTS already has the authority to assess these costs.