U.S. Senator Jack Reed (D-RI), a senior member of the Banking Committee, is strongly backing a new set of proposed federal regulations to govern short-term, high-interest loans that have been blamed for trapping some consumers in a cycle of debt, and is urging other regulators such as the Federal Reserve to issue guidance as well.
Reed praised proposed guidelines to impose strict new limits on so-called "deposit advance loans" that were put forth today by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC). The regulators found that banks offering deposit advances have high fees and often fail to utilize "fundamental and prudent banking practices" to determine the customer's ability to repay the loan.
The new guidance from the OCC and FDIC would help improve underwriting standards by mandating that banks offering these payday-style loan products take a borrower's ability to repay the loan without needing to incur additional deposit advance borrowing into consideration before making the loan; ensure borrowers repay the loan before taking out additional loans; and institute a "cooling-off" period to prevent borrowers from taking multiple deposit advances during a monthly statement cycle. The guidelines also call for the bank's board of directors to approve policies regarding underwriting of deposit advance loans.
"I support the OCC's and FDIC's proposed guidance regarding deposit loan advance products. Assessing a customer's ability to repay a loan makes good common sense and business sense. These products aren't much different from other payday loans out there. We need to increase transparency and strengthen lending practices to safeguard both consumers and the banking system from risky products that may cause more harm than good. I urge the Federal Reserve to take similar action," said Reed.
Yesterday, the Consumer Financial Protection Bureau (CFPB) issued an in-depth Payday Loans and Deposit Advance Products study showing that "payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden," according to CFPB Director Richard Cordray. The study examined more than 15 million payday loans over a year-long period to analyze consumer behavior and found that more than half of direct-deposit borrowers took out advances totaling $3,000 or more. Of these borrowers, well over half paid off one loan and went back for another within 12 days. According the CFPB, the average borrower took out 10 loans over the 12-month period and paid $458 in fees, which do not include the loan principal. One quarter of borrowers paid $781 or more in fees.