Friday, April 26, 2013

Regulators Eye Bank Payday Lending

The nation's lead bank regulators want banks to think twice before they get involved with payday lending. Supervisory "guidance" proposed this week by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) would have examiners closely scrutinize banks offering deposit advance products.

Deposit advances look and act like payday loans: they're small-dollar, short-term loans made available to bank customers who receive recurring Direct Deposits. The products have been a point of contention with consumer groups and even regulators in the past because like payday loans deposit advances come with high-interest rates and unrealistic repayment schemes. The bank gets first dibs on any funds that come in via Direct Deposit so as to receive repayment of the deposit advance in one lump sum; that, in turn, leaves the borrower with insufficient funds to cover other expenses and little choice but to borrow again.

The Consumer Financial Protection Bureau has been looking into payday loans and deposit advances; it held a series of field hearings last year and this week it published a detailed white paper and initial data findings on payday lending and deposit advance loans. Reflecting the cycle of debt scenario opponents invoke, the CFPB said its research revealed the median deposit advance made by a bank was for $180, yet the average daily advance balance per borrower was $343.

Meanwhile, measures have been introduced by lawmakers in several states and localities that aim to either regulate or outright ban payday lenders.

In a press release announcing the proposed guidance, the OCC said it "encourages national banks and federal savings associations to respond to customers' short-term credit needs. However, deposit advance products can pose a variety of safety an soundness, compliance, consumer protection and other risks."

A press release from the FDIC expressed the same sentiments, but had this to add: "If structure properly, small-dollar loans can provide a safe and affordable means for borrowers to transition away from reliance on high-cost debit products. A number of banks are currently offering such reasonably6 priced small-dollar loans at reasonable terms to their customers. The FDIC encourages banks to continue to offer these products, consistent with safety and soundness and other supervisory considerations."

Consumer groups lauded the agency's proposal, but took a swipe at the Federal Reserve Board which has remained mum on the subject despite having regulatory authority over some banking companies that make these controversial loans.

The FDIC and OCC both said they are rescinding previous guidance on deposit advances by banks, and they gave interested parties 30 days to comment on their latest proposals.

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