These products are similar to payday loans because of their triple-digit interest rates, short terms with balloon payments, and lack of underwriting requirements before approval.
Like payday loan borrowers, consumers who use deposit advance products often find themselves in sustained periods of use and indebtedness. The Consumer Financial Protection Bureau (CFPB) released a report in the spring of 2013 that looked at payday loan and deposit advance characteristics and found that the median number of deposit advance loans per customer per year was eight, with a median period of indebtedness of 121 days, or 31 percent of the year.
Woodstock Institute commented on the proposed rules when they were first released in April, 2013. We commended the OCC and FDIC for including strong underwriting standards that considered a borrower’s true ability to repay, set a limit of one loan per month with a one-month cooling off period in between, and required banks to monitor their reliance on fees and charges from these products. In addition to those protections, we urged the OCC and FDIC to set a cap on total fees and charges, require upfront disclosure of the annual percentage rate (APR), and eliminate a bank’s ability to mandate automatic loan repayment through their access to a borrower’s bank account.
After receiving comments from advocates and industry representatives, we are pleased that the OCC and FDIC maintained the strong underwriting standards originally proposed, including:
- Borrowers must have a customer relationship with the bank of at least six months. Anything less does not provide the bank with enough transaction history to adequately access a person’s ability to repay a loan;
- Any customers with delinquent or classified credits are deemed ineligible for this type of product;
- A customer’s ability to repay is determined by looking at the six months of inflows and outflows from the individual’s account (where other lines of credit cannot be considered as inflows) with a focus on the net surplus or deficit at the end of each of the six months;
- A deposit advance credit limit cannot be increased without a completely new underwriting assessment. This cannot be automatic and must be specifically requested by the borrower; and,
- Continued eligibility must be measured and assessed every six months at a minimum to ensure that a customer’s ability to repay has not changed.
The final rules also preserve the loan limit of one per month with a cooling off period, for a maximum of six loans per year, and the requirement that banks monitor their reliance on charges and fees. In addition, the FDIC and OCC clarified that these guidelines apply to all deposit advance products regardless of whether they are marketed as loans or lines of credit and that the guidelines do not preempt state usury laws.
Currently, six major banks offer deposit advance products: Wells Fargo, US Bank, Fifth Third Bank, Regions Bank, Guarantee Bank, and Bank of Oklahoma. While the Federal Reserve Board, which regulates Regions Bank and Fifth Third, did not participate in the rulemaking, they have encouraged the banks they oversee to observe safe lending practices. We urge the Federal Reserve to ensure that all deposit advance consumers are adequately protected by adopting rules that mirror the rules finalized this week by the OCC and FDIC.