Attorney General Works to Prevent North Carolina Payday Loans
Inside Subprime: Feb 25, 2019
By Lindsay Frankel
A coalition of attorneys general from 14 states, including North Carolina Attorney General Josh Stein, have submitted a letter to the Federal Deposit Insurance Corporation (FDIC) encouraging oversight of bank-issued, small-dollar loans. The attorneys general want to make sure that banks are held accountable for following state laws restricting predatory payday loans as the FDIC guides banks in meeting the small-dollar credit needs of consumers.
North Carolina was the first state in the nation to prohibit the payday loan industry, and the state hasn’t seen any traditional payday loan storefronts since 2006. Before the ban, the large number of servicemembers and veterans in the state attracted payday loan firms, which have been found to prey on military families.
“North Carolina successfully drove out payday lenders charging loan shark interest rates that harmed working families,” said Attorney General Josh Stein.
A short-term payday loan can quickly turn into a long-term debt trap for low-income borrowers. Most borrowers end up paying even more in fees than they received in credit to start, according to Pew Charitable Trusts. And while most borrowers can’t afford to put more than 5 percent of their income towards paying off a loan while still keeping up with their living expenses, the average payday loan eats up 36 percent of a borrower’s gross paycheck.
In November, the FDIC asked for comments about how it could assist banks with offering “responsible, prudently underwritten credit products.” In an attempt to help banks meet the demand for small-dollar loans, the FDIC could potentially reverse previous guidance that warned against banks issuing high-cost “deposit advance” loans.
The letter from the attorneys general requests that the FDIC assist banks in developing standards for verifying a borrower’s ability to pay back a loan. This would include looking at a borrower’s monthly income, debts and expenses, along with considering possible emergency expenses, and making sure the borrower can pay back the loan in full while avoiding re-borrowing.
The Consumer Financial Protection Bureau’s payday loan rule, which has yet to take effect, contains such underwriting requirements for lenders, but the CFPB recently announced that it would rescind those provisions of the rule. Comptroller of the Currency Joseph Otting applauded the step in a statement, saying that it would allow banks to compete in the small-dollar lending market while providing safe and affordable loans to consumers. But banks need guidance in developing products that are both profitable and fair to borrowers with poor credit. That’s where these comments to the FDIC come in. In the absence of a federal law protecting borrowers, attorneys general are encouraging the FDIC to guide banks in developing robust consumer protections.