Washington Post, printed in the St. Louis Post-Dispatch, April 24, 2013
WASHINGTON • Banking regulators are set to hand down tough new rules to govern short-term, high-interest loans that have been blamed for trapping some Americans in a cycle of debt, according to people familiar with the matter.
The rules, which are slated to come out Thursday, could radically alter the operations of the small but growing number of banks, including Wells Fargo and U.S. Bancorp, that offer loans tied to anticipated direct deposits of salary, government benefits or other income. Critics say these products carry the same abusive high interest rates and balloon payments as the payday loans provided by storefront vendors.
At least 15 states have banned the service, while several others have imposed strict laws to limit the interest rates and the number of loans that can be made. Federal regulators are taking cues from state authorities by proposing similar limits, but are stopping short of outright banning banks from engaging in the market.
The proposed regulation would institute a "cooling-off" period that limits borrowers from taking more than one deposit advance during a monthly pay cycle, according to the people familiar with the matter. Borrowers must also repay the loan before taking out additional loans and wait a month between loans. The proposal mandates that banks take a borrower's ability to repay into consideration before making a loan, a standard underwriting practice in all other lending.
Regulators at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. intend the rules to be "very restrictive," said one person familiar with their thinking. But because a third major regulator — the Federal Reserve, which oversees some 850 banks — is not participating in the effort, the scope of the rules may be limited. Calls to the Fed for comment were not returned Tuesday night.
People with knowledge of the proposal say the OCC and the FDIC are concerned about the misuse of bank payday loans.
Banks market these products, with names such as "Early Access" or "Ready Advance," as short-term solutions for emergencies. But borrowers often wind up taking multiple loans that keep them mired in debt.
Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, then tacks on overdraft fees and additional interest.
The perils of direct-deposit advances were a key focus of a new study conducted by the Consumer Financial Protection Bureau. The report, which will be released Wednesday, found that such loans are creating an expensive burden for consumers.
"Lenders may rely on their ability to directly debit the consumer's account . . . rather than assessing whether the loan is affordable in light of the borrower's income and other expenses," CFPB Director Richard Cordray said Tuesday on a call with reporters.
Bureau researchers looked at more than 15 million payday loans over a 12-month period to analyze consumer behavior.
They 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. The average borrower took out 10 loans in a year and paid $458 in fees.
Proponents of alternative financial services welcomed the bureau's study, but cautioned against using broad brush strokes to define the payday industry.
"It is important to underscore that this preliminary report is a starting point for further conversations rather than a set of definitive conclusions," said Dennis Shaul, chief executive of the Community Financial Services Association of America, an industry trade group.
The CFPB has supervisory and enforcement authority for storefront and bank payday lenders with more than $10 billion in assets. The report brings the CFPB a step closer to imposing its own rules to govern the industry.
People familiar with the matter say the bureau advised the OCC and the FDIC on the proposed regulations.
The proposed guidance is modeled after rules the OCC issued in 2000 that barred banks from engaging in direct payday lending. Banks circumvented that guidance by tying their short-term loans to direct deposits.
Officials at Wells Fargo insist that the bank is offering a vital service designed to help customers with unforeseen financial emergencies, such as car repairs.
"It is an expensive form of credit, and we are very clear and upfront with our customers about that. It is not intended to solve long-term financial needs," Wells Fargo spokeswoman Richele Messick said.
The bank, which debuted the product in 1994, offers an installment plan for customers to avoid balloon payments. But it is offered only to people with at least $300 in outstanding debt who have been hit with balloon payments for three consecutive months. Messick declined to comment on the forthcoming guidance until regulators officially issue them.
Advocacy groups have long been concerned that federally regulated banks can sidestep stricter state laws that govern payday lenders. Last month, the Center for Responsible Lending issued a report urging bank regulators to ban direct-deposit advances before the practice spreads from a few banks to the entire system.
In addition to Wells Fargo and U.S. Bancorp, the other banks that offer such loans are Regions Bank, Fifth Third Bank, Guaranty Bank and Bank of Oklahoma.