At least 15 states have banned the service, while several others have imposed strict laws to limit the interest rates and the number of loans that can be made. Federal regulators are taking cues from state authorities by proposing similar limits, but are stopping short of outright banning banks from engaging in the market.
The proposed regulation would institute a “cooling-off” period that limits borrowers from taking more than one deposit advance during a monthly pay cycle, according to the people familiar with the matter. Borrowers must also repay the loan before taking out additional loans and wait a month between loans. The proposal mandates that banks take a borrower’s ability to repay into consideration before making a loan, a standard underwriting practice in all other lending.
Regulators at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. intend the rules to be “very restrictive,” said one person familiar with their thinking. But because a third major regulator — the Federal Reserve, which oversees some 850 banks — is not participating in the effort, the scope of the rules may be limited. Calls to the Fed for comment were not returned Tuesday night.
People with knowledge of the proposal say the OCC and the FDIC are concerned about the misuse of bank payday loans.
Banks market these products, with names such as “Early Access” or “Ready Advance,” as short-term solutions for emergencies. But borrowers often wind up taking multiple loans that keep them mired in debt.
Account holders typically pay up to $10 for every $100 borrowed, with the understanding that the loan will be repaid with their next direct deposit. If the deposited funds are not enough to cover the loan, the bank takes whatever money comes in, then tacks on overdraft fees and additional interest.
The perils of direct-deposit advances were a key focus of a new study conducted by the Consumer Financial Protection Bureau. The report, which will be released Wednesday, found that such loans are creating an expensive burden for consumers.
“Lenders may rely on their ability to directly debit the consumer’s account . . . rather than assessing whether the loan is affordable in light of the borrower’s income and other expenses,” CFPB Director Richard Cordray said Tuesday on a call with reporters.
Bureau researchers looked at more than 15 million payday loans over a 12-month period to analyze consumer behavior.