Coalition Urges FDIC to Advise Banks Against Issuing Payday Loans

Inside Subprime: Aug 27, 2018

By Lindsay Frankel

A broad coalition of consumer advocates has asked Federal Deposit Insurance Corporation (FDIC) chairman Jelena McWilliams to advise banks against making deposit advance loans. These loans bear similarities to high-cost payday loans, which often carry triple-digit interest rates that trap borrowers in a cycle of debt.

The letter is the latest in a series of recommendations from consumer advocate, faith, and civil rights organizations since the Office of the Comptroller of the Currency (OCC) withdrew guidelines against bank payday loans in October of 2017. Just a day later, more than 230 organizations collaborated in an open letter to banks. In May, numerous organizations wrote a letter to Congress urging regulators to take measures to protect consumers from risky deposit advance loans.

The most recent coalition letter explained that deposit advance loans were no different than payday loans in terms of causing undue financial harm to consumers. These harmful products resulted in about half a billion dollars in annual losses from bank customers. In addition, consumers faced overdraft fees, difficulty covering everyday expenses, and even bankruptcy resulting from the use of bank payday loans. The letter went on to say that “Payday lending by banks was met by fierce opposition from virtually every sphere – the military community, community organizations, civil rights leaders, faith leaders, socially responsible investors, state legislators, and members of Congress.”

The coalition asked McWilliams to maintain the FDIC’s recommendation that banks determine a borrower’s ability to repay when issuing a small-dollar loan. The letter also urged the FDIC to cap interest rates at 36 percent or less and prohibit bank partnerships that make it possible for banks to avoid such limits.

In an interview with the Wall Street Journal, McWilliams said she would reconsider rescinding the FDIC’s 2013 guidelines for bank payday loans, which stated that “deposit advance products can pose a variety of credit, reputational, operational, compliance and other risks.” At the time the guidelines were released, the FDIC also acknowledged the need for safe, small-dollar loan products and encouraged banks to develop affordable credit options.

Before the FDIC’s 2013 guidelines, annual interest rates on deposit advance loans averaged 225 to 300 percent. The letter also noted that payday loans disproportionately affect underserved communities. And since the Consumer Financial Protection Bureau delayed its payday loan rule for reconsideration, borrowers are left vulnerable to unsafe loans issued by both payday lenders and banks.

While the FDIC considers guidelines to protect consumers from predatory loans, consumers need to be aware of the dangers of payday loans and their bank-issued counterparts. Whenever possible, borrowers should seek alternatives to these risky products in order to evade an insurmountable cycle of debt.

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