Two federal bank regulators, the Federal Deposit Insurance Corporation, or FDIC, and the Office of the Comptroller of the Currency, or OCC, recently requested comments on their “Proposed Guidance on Deposit Advance Products.” Read the full comment letter to the FDIC here and to the OCC here.
The Center for American Progress applauds the FDIC and OCC’s efforts to examine deposit-advance products. A deposit-advance loan is a short-term loan for bank customers who use direct deposit to automatically add income to their accounts. The loan is then repaid directly from their next deposit. This product is very similar to payday loans that are generally made by nonbank financial institutions such as check cashers. Because of their high fees and predatory nature, about one-third of all states ban payday loans. But state payday-lending laws do not always apply to bank products such as deposit-advance loans.
In April the Consumer Financial Protection Bureau, or CFPB, released a white paper on payday loans and deposit-advance loans based on new analysis of data from lenders. The analysis found that deposit-advance loans made by banks clearly resemble the controversial, high-cost payday loans made by nonbanks. In both cases, interest rates could be quite high—with annual interest rates above 300 percent. Meanwhile, states that ban high-cost payday lending cap interest and fees at 36 percent per year, and the same cap exists for most short-term loans made to military service members and their families. The CFPB white paper also reaffirmed past research that showed borrowers often needed to take out loans again and again, suggesting larger financial distress.
The proposed guidance by the FDIC and OCC would go a long way toward reining in high-cost deposit-advance loans. First, it labels these loans as potentially risky to banks because they may be harmful to consumers and may not be promptly repaid. Second, it requires banks to assess each consumer’s ability to repay. This involves looking at account behavior over the past six months to determine how much money he or she could borrow and reasonably pay back. And third, it adds a cooling-off period for borrowers, who would need to wait at least a month between paying off one deposit-advance loan and taking out another.
These provisions ensure that banks act responsibly when making deposit-advance loans, rather than making loans that consumers may not be able to repay and that may trap consumers in debt. But two additional recommendations would strengthen this proposed guidance.
- The FDIC and OCC should both set a specific fee cap. The proposed guidance acknowledges that products must be affordable but does not set specific limits on fees. Limiting all fees on deposit-advance loans to an annual interest rate of 36 percent would be a useful starting point. This is consistent with the FDIC’s 2007 Affordable Small-Dollar Loan Guidelines, with many state laws that ban payday lending, and with the 2006 Military Lending Act, which governs high-cost loans made to service members and their families. To be effective, this cap must include all fees. As noted in a column published in the Richmond Times-Dispatch on February 4, 2013, for example, Virginia has a 36 percent annual interest cap on payday loans, but once two additional fees are included, the annual interest rate rises to 282 percent.
- The FDIC and OCC should encourage the other financial regulators to adopt the same guidance. The Federal Reserve released a policy statement recognizing that deposit-advance loans may be harmful, and the National Credit Union Administration is looking into credit unions that make high-cost, short-term loans. But regulators should adopt uniform guidance whenever possible. Consumers deserve the same financial protections regardless of which regulator oversees the bank or credit union where they have an account.
By applying new standards to deposit advances that ensure banks only make loans that can reasonably be repaid, the FDIC and OCC will be able to prevent the spread of high-cost, short-term loan products that can lead financially distressed consumers into a cycle of debt.
Joe Valenti is the Director of Asset Building at the Center for American Progress.