The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. will soon impose strict limits on so-called deposit-advance loans, according to people familiar with the regulators' plans.
Among the regulators' intended mandates are a month-long "cooling-off period" between the repayment of one loan and the issuance of another and a requirement that banks underwrite the product. Those changes could force FDIC- and OCC-regulated banks offering the small-dollar loans, which are similar to payday loans offered by nonbanks, to either dramatically change their products or drop them entirely.
Meanwhile, the Consumer Financial Protection Bureau is considering a crackdown of its own. The agency released a report released Wednesday that drew strong parallels between traditional storefront payday loans and the deposit-advance loans offered by banks, and hinted at reforms that would affect banks and nonbanks alike.
The OCC guidance "is roughly patterned on payday loan guidance that had the effect of becoming extremely restrictive," said someone familiar with the OCC proposal. "The OCC will closely review the activities of banks that offer or propose to offer deposit advance products."
The OCC and FDIC guidance will be separate but highly similar, according to someone familiar with both versions. Both are expected to be released Thursday. A spokeswoman for the FDIC declined to confirm or comment on its plans.
Notably, the Federal Reserve — which regulates Regions Financial (RF) and Fifth Third Bancorp (FITB), two major state-chartered lenders in the deposit advance lending business — will not be joining its fellow regulators, according to people familiar with the FDIC and OCC plans. The regulator did not immediately respond to a request for comment.
Other banks that offer deposit advance loans include Wells Fargo (WFC) and U.S. Bancorp (USB). Both of those companies' bank units are regulated by the OCC.
Among the most significant language in the proposed OCC guidance will be a requirement that banks consider "borrowers' financial capacity" to repay such deposit advance loans. That appears to be synonymous with the consumer advocates' demand that banks consider whether deposit advance borrowers have an ability to repay their debts rather than simply rolling them into future obligations.
In keeping with that requirement, the regulators will also require that the short-term loans be paid back in full before any new credit is offered. Consumers would then need to wait a month before taking out a new deposit advance loan, thereby limiting the number of loans that any one borrower can take out to six a year.
The expected guidance would be a significant victory for consumer advocacy groups that have assailed deposit-advance products as abusive. By repeatedly offering small-dollar credit to people who are living paycheck to paycheck, such industry critics argue, banks only worsen their customers' financial troubles.
"Banks never should have been in the payday loan business, and we support the OCC in ensuring what should have been obvious — that loans should not be paid to consumers that can't repay them," says Lauren Saunders, an attorney for the National Consumer Law Center. "We are happy the OCC is addressing those problems."
Such arguments have gained traction over the last few years in the consumer financial product regulatory arena, said Kathleen Day, a spokeswoman for the Center for Responsible Lending. Both the CARD Act and Dodd-Frank Act enshrined the ability to repay as a requirement for credit cards and mortgages.
"Assessing a person's ability to repay a loan is essential for any lending product. It's basic banking," says Day. "We haven't seen [the OCC and FDIC proposed guidance] yet, but if true, we hope the Fed takes similar action on bank payday loans and that CFPB takes similar action on all payday loans."
Regulators are also getting pressure from some Democrats on Capitol Hill. In January, five Senate Democrats urged the FDIC, the OCC and the Fed to stop such loans, calling them unsafe and unsound.
The guidance expected from the OCC dovetails with the CFPB's findings in a new 45-page report. Consumers use traditional payday loans in much the same way they use deposit-advance loans, according to that report, and both products often become debt traps.
The report found that two-thirds of payday borrowers that were studied had at least seven loans in a year. Meanwhile, more than half of deposit advance borrowers in the study took out loans totaling more than $3,000, and those borrowers tended to be in debt for more than 40% of the year, according to the CFPB report.
"What we found is there is not much difference, from the consumer's perspective, between payday loans and deposit-advance loans," CFPB Director Richard Cordray said during a conference call announcing the report's findings.
The CFPB study hints at support for the kinds of potential reforms that are expected to be proposed Thursday by the OCC and FDIC.
For example, the CFPB report states that consumers' sustained use of payday loans and deposit advances may result in part from a lack of good underwriting.
"Lenders may rely on their ability to directly debit the consumer's account when the consumer's next paycheck or benefits payment is due rather than assessing whether the loan is affordable in light of the borrower's income and other expenses," Cordray told reporters. "Other obligations like rent, grocery bills, or utility bills may not be factored into the loan consideration at all."
The CFPB report also mentions cooling-off periods, stating that the consumer bureau will analyze their effectiveness in curbing sustained use of the loans.
"We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances," Cordray said. "Debt traps should not be part of their financial futures."
A senior CFPB official added that the CFPB expects to use its legal authorities, which cover banks and payday lenders, to protect consumers. That official declined to comment on the expected actions of the OCC and the FDIC, but said that the consumer bureau works closely with those agencies.
The CFPB study was based on data provided by banks and payday lenders.
From payday lenders, the bureau looked at a sample of about 15 million loans from storefront lenders in 33 states. From the banks, the bureau looked at more than 100,000 eligible deposits accounts, about 15% of which had at least one deposit advance.
Senior officials at the CFPB declined to say how many banks provided data for the study.