Federal Regulators' Guidance on Small-Dollar Loans Sparks Fears of High-Cost Bank Payday Loans

Strategic Insights -

The Federal Deposit Insurance Corp. (FDIC) has announced plans to repeal two guidances that protect consumers against high-cost bank payday loans over 36%, amid the COVID-19 pandemic. This move has been met with concerns from advocates, who warn that it may encourage banks to make unaffordable loans that trap borrowers in a cycle of debt. The new joint guidance issued by the FDIC, Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and National Credit Union Administration (NCUA) emphasizes the importance of responsible lending practices, but some critics argue that it offers few specifics and may inadvertently permit balloon-payment bank payday loans.

Key Takeaways:

  • The FDIC plans to repeal two guidances that protect consumers against high-cost bank payday loans over 36%, sparking fears of a return to unaffordable loans.
  • The new joint guidance emphasizes responsible lending practices, but some critics argue that it may inadvertently permit balloon-payment bank payday loans.
  • Lauren Saunders, deputy director of the National Consumer Law Center, warned that bank payday loans, like traditional payday loans, put consumers in a debt trap and that the American public strongly supports limiting interest rates to 36%.
  • The OCC and FDIC issued guidance in 2013 warning about the problems caused by bank payday loans, but the OCC repealed its guidance in 2017.
  • The FDIC announced that it would repeal its deposit advance product guidance, along with its 2007 small dollar loan guidance that encouraged banks to limit interest rates on small dollar loans to 36%.
  • The new joint guidance encourages banks and credit unions to make "responsible" small dollar loans with appropriate underwriting and terms, but some critics argue that it offers few specifics and is vague on appropriate interest rates.
  • Advocates warn that the SDLA proposal may lead to "rent-a-bank" schemes where banks help non-bank lenders make triple-digit interest loans that are illegal under state law.

Statistics:

  • In the last recession, a handful of banks were making balloon-payment bank payday loans that put borrowers in an average of 19 loans a year at over 200% annual interest.
  • Most banks stopped making bank payday loans in 2013 after the OCC and FDIC issued guidance warning about the problems the loans cause.
  • The joint guidance emphasizes that pricing should be reasonably related to the institution's risks and costs.

Sources:

  • National Consumer Law Center
  • Federal Deposit Insurance Corp. (FDIC)
  • Office of the Comptroller of the Currency (OCC)
  • Federal Reserve Board (FRB)
  • National Credit Union Administration (NCUA)
  • Consumer Financial Protection Bureau (CFPB)