Payday lenders can trap working people in a never-ending cycle of debt. Big Banks also have gotten into the business by offering “deposit advance” loans. For years, consumer advocates have been calling on regulators to rein in abusive payday loans, which often charge interest at more than 300% per year. These exorbitantly high interest rates drain money from low-income communities.
Last week, two federal banking regulators issued proposed guidance that will rein in predatory bank payday loans. The Office of the Comptroller of Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) want banks to consider a borrower’s ability to repay a loan before making a deposit advance loan. While this seems like common sense, a borrower’s ability to repay is often not part of a banker’s calculation when deciding whether to extend a payday loan.
The proposed rules by the OCC and the FDIC will only apply to some banks. Further action is required by Consumer Financial Protection Bureau (CFPB) and the Federal Reserve for other financial institutions.
The CFPB recently released a study of payday and deposit advance loans, explaining that “Loose lending standards, high costs and risky loan structures may contribute to the sustained use of these products, which can trap borrowers in debt.” This study will provide the basis for the CFPB to issue strong rules for the lenders it oversees. The Federal Reserve, however, has taken a weaker position on payday lending. It issued a statement last week that the financial institutions it regulates should “analyze the legal risks of any deposit advance products before offering such products.”
As AFL-CIO Executive Vice President Arlene Holt Baker explains, “Minority and low-income borrowers are particularly at risk of being trapped into a revolving cycle of high-cost payday loans. We are encouraged that these bank regulators are taking action, and we urge the Federal Reserve to propose similar guidance that will apply to banks it oversees.”