The proposed standards require an assessment of the borrower’s eligibility for the product and financial capacity to repay the loan and meet other financial obligations, limit the number of such loans borrowers can receive in one year, and mandate adequate management and monitoring of the significant safety and soundness risks posed by offering these high-cost, short-term loans. The public has an opportunity to comment on the proposed guidance.
Disappointingly, the Federal Reserve released a weaker statement regarding obligations of banks it regulates to comply with existing federal and state laws and regulations in light of significant compliance risks and consumer harm posed by such bank payday products.
“Under this guidance, banks would no longer be able to perpetuate a cycle of debt with high-cost, short-term loans that disproportionately drain wealth from those who can least afford it,” said Dory Rand, president of Woodstock Institute. “Bank payday loans are predatory products cloaked in the credibility of a mainstream financial institution. While it’s high time for bank payday loans to disappear, the OCC and the FDIC’s proposed guidance takes major steps towards reducing the consumer harm caused by these pernicious products.”
“The guidance applies existing laws and regulations to require common-sense underwriting and risk management standards to the Wild West of bank payday lending,” said Rand. “Verifying a borrower’s ability to repay a loan while meeting living expenses and other obligations is critical to ensuring the sustainability of any credit, especially high-cost credit. Limiting the amount of time a borrower can be in debt ends a destructive debt trap. Engaging in predatory lending practices can hurt a bank’s reputation and bottom line.”
The proposed guidance from the OCC and the FDIC:
• Requires banks to determine whether a borrower is eligible for the product and whether the borrower can repay bank payday loans and meet living expenses and existing obligations without repeated roll-overs. Banks must assess the length of the borrower’s relationship with the bank, whether the borrower has a damaged credit background, and the borrower’s income and outflows (including other credit obligations and regular living expenses). Borrower eligibility must be reevaluated every six months.
• Breaks the cycle of consumer debt by limiting the number of bank payday loans that can be offered to a borrower to six per year. Banks cannot offer more than one loan per monthly statement cycle and must provide a cooling-off period of one month before another loan can be advanced.
• Ends automatic credit limit increases. The credit limit on bank payday products can be increased only if affirmatively requested by the borrower.
• Flags regulators’ concerns about how bank payday products may violate existing consumer protection and other federal and state laws and regulations and requires examiners to closely evaluate compliance and management.
• Outlines the safety and soundness risks bank payday products may pose to banks. The guidance requires that banks hold adequate capital to account for the high-risk nature of bank payday and warns against over-reliance on fee income from payday products.
Several banks make short-term loans that are often advertised in innocuous language such as “direct deposit advances” but are really no different from payday loans made in storefronts or online. Yesterday, the Consumer Financial Protection Bureau (CFPB) released a white paper describing the typical features of bank payday loans:
• Bank payday loans frequently have annual percentage rates of more than 300 percent.
• Lenders do not assess borrowers’ ability to repay the loans while meeting living expenses and other existing obligations (no underwriting criteria).
• Although banks argue that their payday loans are for emergency use, these loans often trap borrowers in a long-term cycle of debt. The CFPB found that bank payday borrowers took out a median of eight loans per year. More than a quarter of bank payday borrowers took out more than $6,000in loans per year, translating to a median of 26-38 loans. Bank payday borrowers were in debt for a median of seven months per year.
• Since bank payday lenders have access to borrowers’ bank accounts, they can debit the loan repayment as soon as the next direct deposit clears—prioritizing payday loans over necessities such as rent, groceries, and utility bills and potentially triggering overdraft fees. The CFPB found that bank payday borrowers were, on average, more than four times as likely as non-borrowers to incur overdraft fees.
The OCC previously acknowledged the harm that payday loans cause to both borrowers and financial institutions in 2003, when the OCC issued consentorders requiring several banks under its supervision to exit the business of financing storefront payday lenders because of the threats the product poses to the safety and soundness of the banks. Banks who offer payday products risk their reputations by eroding consumer confidence and community support.
In the past, banks have evaded state consumer protection laws, including Illinois law, because of loopholes in state laws or because they were made by nationally-chartered financial institutions. For example, Illinois limits repayments on payday loans to 25 percent of a borrower’s gross monthly income. A borrower can take out a Wells Fargo Direct Deposit Advance loan that totals more than 35 percent of his or her monthly income. Direct Deposit Advance loans can be rolled over up to six times before a cooling-off period, while payday loans in Illinois can be rolled over only three times (up to 45 days) before a required break. Illinois enforces its consumer protection laws by requiring payday lenders to enter their loans into a real-time database, which does not currently happen with bank payday loans. Even more distressing, banks have offered payday loans in states such as North Carolina where payday lending is prohibited. Today’s proposed guidance emphasizes that banks must comply with applicable state laws and regulations in addition to federal laws and rules.
Woodstock Institute has long called for an end to bank payday lending. Woodstock, along with three other organizations, called upon the OCC to downgrade Wells Fargo’s Community Reinvestment Act rating for offering bank payday products that clearly fail to meet community credit needs. Consumers across the country agree: the Center for Responsible Lending collected more than 157,000 signatures asking regulators to get banks out of the payday business.
“We urge the Federal Reserve Board to also issue a strong guidance that limits the negative impact of bank payday lending,” said Rand. “Every day that goes by without strong rules perpetuates a toxic cycle of debt for consumers and dangerous risks to banks and our financial system.”
Banks currently offering “deposit advance” products include Wells Fargo Bank, US Bank, Fifth Third Bank, Regions Bank, Guaranty Bank and Bank of Oklahoma. The OCC regulates national banks, including Wells Fargo and US Bank. The Federal Reserve regulates state member banks, including Fifth Third and Regions. The FDIC regulates the other banks, including Guaranty Bank and Bank of Oklahoma.
For more information, please contact Katie Buitrago at 312-368-0310 or firstname.lastname@example.org.