Around a decade ago, banks’ “deposit advance” products put borrowers in an average of 19 loans per year at more than 200% annual interest
Important FDIC consumer protections repealed
On Wednesday, four banking regulators jointly issued new small dollar lending guidance that lacks the explicit consumer protections it should have. At the same time, it does require that loans be responsible, fair, and safe and sound, so banks would be wrong to use it as cover to once again issue payday loans or other high-interest credit. The guidance also explicitly advises against loans that put borrowers in a continuous cycle of debt — a hallmark of payday loans, including those once made by a handful of banks. The guidance was issued by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC).
The Center for Responsible Lending (CRL) Senior Policy Counsel Rebecca Borné issued the following statement:
“The COVID-19 crisis has been economically devastating for many Americans. Banks would be wrong to exploit this desperation and to use today’s guidance as an excuse to reintroduce predatory loan products. There is no excuse for trapping people in debt.
“In conjunction with today’s guidance, the FDIC jettisoned explicit consumer safeguards that have protected customers of FDIC-supervised banks for many years. These commonsense measures advised banks to lend at no higher than 36% annual interest and to verify a borrower can repay any single-payment loan before it is issued.
“It was this ability-to-repay standard released jointly by the FDIC and OCC in 2013 that stopped most banks from issuing “deposit advance” payday loans that trapped borrowers in an average of 19 loans a year at, on average, more than 200% annual interest.
“The FDIC’s 2005 guidance, updated in 2015, remains on the books. That guidance limits the number of days lenders can keep borrowers stuck in payday loan debt to 90 days in 12 months. There would be no reasonable justification for removing this commonsense safeguard, and the FDIC should preserve it.
“Today, as banks are now borrowing at 0% annual interest, it would be deeply concerning if they would charge rates above 36%, the maximum rate permitted for loans made to military servicemembers.”
Wednesday’s action includes the rescission of two important FDIC consumer protections: 2007 affordable small loan guidelines that advised a 36% annual interest rate cap (again, similar to a law that prohibits interest rates above 36% for loans to military servicemembers) and a 2013 guidance that advised banks to verify a person could repay short-term single-payment loans, which are typically unaffordable.
The FDIC also announced that a 2005 guidance from the FDIC, updated in 2015, will be resissued with “technical corrections.” This 2005 FDIC guidance addresses bank involvement in short-term payday loans by advising that borrower indebtedness in such loans be limited to 90 days in 12 months. This standard is important to ensuring that borrowers are not stuck in payday loan debt traps at the hands of banks, and the FDIC should preserve it.
The joint bank regulators’ guidance is part of a trend of regulators weakening consumer protections for small dollar loans. The four agencies, plus the Consumer Financial Protection Bureau (CFPB), previously issued a disappointing statement on small dollar guidance during the COVID-19 crisis. Also, the CFPB is expected to gut a 2017 rule that would curb payday loan debt traps. Finally, the FDIC and OCC are working together on joint guidance that could encourage banks to initiate or expand their rent-a-bank schemes, whereby banks, which are generally exempt from state usury limits, rent out their charter to non-bank lenders, which then offer loans, some of which are in the triple digits and have default rates rivaling payday loans.