The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have issued new guidelines for the banks they oversee that are intended to rein in short-term consumer loans that may be as dangerous to consumers as payday loans. Although the new guidelines do not completely disallow deposit advances, they should reduce the banks’ profits while making the loans safer for borrowers, according to the New York Times editorial board.
Under the guidelines, banks must determine whether the borrower can repay without having to borrow multiple times to meet expenses. While payday lenders have marketed themselves as a harmless option for people who need cash quickly, the industry actually earns huge profits from borrowers who cannot afford to repay the loan under the original two-week agreement, and must renew over and over, paying an average fee of about $50 for each renewal. This can put borrowers in debt for months with loans that can carry an interest rate of 400 percent or more. Some banks offer “deposit advance” loans that work much like payday loans, although a study by the Consumer Financial Protection Bureau found that overdraft fees drain the borrower’s account and force him or her to borrow multiple times. Under the new guidelines, banks will be barred from making more than one loan per monthly statement cycle, and cannot extend a new loan before the previous one is repaid. Banks also must provide borrowers with clear and accurate terms.
The editorial board recommends that the Federal Reserve issue rules to make these loans "less onerous" to consumers.