Federal regulators are poised to crack down on payday loans â€" the short-term, high-cost credit that can further mire borrowers in debt. But instead of taking aim at storefront payday lenders in strip malls and along highways, they are focusing on their big bank rivals like Wells Fargo and U.S. Bank, according to several people briefed on the matter.
A handful of banks offer the loans tied to checking accounts, and they typically vary slightly from those made by traditional payday lenders. The banks allow borrowers to take out money against a checking account with the promise that the lender can automatically withdraw the loan payment â€" plus the origination fee â€" when it is due.
Regulators from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are expected to clamp down on the loans, which bear interest rates than can soar beyond 300 percent, by the end of the week, according to people with direct knowledge of the guidance.
The F.D.I.C. and the comptroller’s office declined to comment. Wells Fargo declined to comment and U.S. Bank could not be reached for comment.
The regulators are expected to impose more stringent requirements on the loans. Before making a payday loan, banks will have to assess a consumer’s ability to repay the loan. The banking authorities are also expected to institute a mandatory cooling-off period of 30 days between loans â€" a reform intended to halt what consumer advocates call a debt spiral with borrowers taking out new payday loans to cover their outstanding debt. As part of that, banks will not be able to extend a new loan until a borrower has paid off any previous direct-deposit loans.
Another requirement, the people said, will address the marketing of the products. Typically, the advances are not described as loans. The result is that the interest rates are largely hidden from borrowers. The banking regulators will now require that banks disclose the interest rates on the loans, according to the people familiar with the guidance.
Some of the guidelines would hew closely to mortgage rules already required under the Dodd-Frank financial overhaul law. Under the law â€" passed in the wake of the 2008 financial crisis to stem the kind of risky lending that plunged the housing market to its lowest levels since the Great Depression â€" lenders have to calculate a customer’s ability to shoulder the principal and interest payments over the life of a loan.
The direct deposit loans, bank analysts say, are an outgrowth of guidance issued by the comptroller’s office in 2000. At that point, the regulator effectively banned banks from becoming payday lenders. The direct-deposit loans, though, fall into a loophole in that guidance because they are not technically payday loans. They have proliferated since the financial crisis, according to consumer advocates, spurred in part by constricted credit and the aggressive search by banks for fresh sources of revenue after losing billions of dollars in income from federal regulations that restrict fees on debit and credit cards.
Banks vehemently deny that the loans are predatory and point out that they are simply catering to demand from consumers. The banks add that the costs are outlined up front and that the loans are explicitly identified as expensive forms of credit.
For low-income consumers, often already in a precarious financial position, the loans can result in a torrent of overdraft charges and fees for insufficient funds. Borrowers who take out payday loans are roughly two times as likely to be pummeled with an overdraft fee, according to a March report by the Center for Responsible Lending.
The impact of the loans can be especially devastating for seniors, according to the report. In March, the government began depositing benefits, including social security and disability payments, directly into checking accounts. Seniors who take out the loans could see their benefits siphoned to pay overdraft or other fees amassed from that initial payday loan.
The move by regulators is the latest salvo in sweeping push against the payday loans. Last May, the F.D.I.C. said the banking regulator was “deeply concerned†about payday lending. And the comptroller’s office said in June 2011 that the loans increased “operational and credit risks and supervisory concerns.â€
