CFPB, FDIC Weigh in on Payday, Deposit Advance Loans (April 25, 2013)
Payday and deposit advance loans were in the news today, with a new report from the Consumer Financial Protection Bureau (CFPB) and a Notice of Proposed Guidance from the FDIC each indicating that regulators soon could tighten rules governing short-term credit products.
Payday and deposit advance loans can lead to a repeating cycle of indebtedness for many consumers, according to the CFPB report. While such loans typically are marketed as a way to bridge a cash flow shortage between paychecks or other income, the report maintains that borrowers often roll over the loans or take out additional loans—often a short time after the previous loan was repaid, winding up in a cycle of repeated borrowing and racking up high costs over time.
The study examined more than 15 million storefront payday loans over a period of 12 months to determine how much consumers borrowed, for how long and how much they wound up paying. (Online loans were not included in the study, but the CFPB said it’s preparing to analyze the growing online payday lending sector.) Among the aspects of payday and deposit advance loans that most contribute to a cycle of debt for borrowers, according to the report, are “loose lending standards, risky loan structures and high costs.”
While the agency did not specify when or how it might regulate short-term lending practices, the report said “the potential consumer harm and the data gathered to date are persuasive that further attention is warranted to protect consumers.”
Meanwhile, the FDIC released a Notice of Proposed Guidance on deposit advance products with request for industry comment over a 30-day period dating from the publication of the notice in the Federal Register. (As of this afternoon, the notice had not yet been published.) The notice “details the principles the FDIC expects FDIC-supervised financial institutions to follow in connection with any deposit advance product to address potential reputational, compliance, legal and credit risks.”
“I do see implications for prepaid as many program managers have been trying to come up with programs to provide small-dollar, short-term credit to prepaid card holders,” Terry Maher, a partner at Baird Holm LLP, tells Paybefore. “Many of these deposit advance products are not underwritten or only undergo limited underwriting. The FDIC guidance … subjects the financial institutions supporting deposit advance products to the full range of regulatory requirements, thus making it next to impossible for FIs to provide the products on a profitable basis.”
Comments on the proposal can be made at the FDIC’s Website or delivered via email to firstname.lastname@example.org. Comments also can be mailed to: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429.