The CFPB has issued a report on payday and deposit advance loans finding that for many consumers these products lead to a cycle of indebtedness. The loans generally have three features: they are small-dollar amounts; borrowers must repay them quickly; and they require that a borrower repay the full amount or give lenders access to repayment through a claim on the borrower’s deposit account.
The report found many consumers repeatedly roll over their payday and deposit advance loans or take out additional loans; often a short time after the previous one was repaid. This means that a sizable share of consumers end up in cycles of repeated borrowing and incur significant costs over time.
The CFPB has authority to oversee the payday loan market. It began its supervision of payday lenders in January 2012. The CFPB also has authority to examine the deposit advance loans at the banks and credit unions it supervises, which are insured depository institutions and credit unions, and their affiliates, that have more than $10 billion in assets. The CFPB believes the report will help educate regulators and consumers about how the industry works and provide market participants with a clear statement of CFPB concerns.
The FDIC has proposed for public comment supervisory guidance to FDIC-supervised financial institutions that offer or may consider offering deposit advance products. The proposal is intended to ensure that banks are aware of a variety of safety and soundness, compliance, and consumer protection risks posed by deposit advance loans.
The proposal details the principles that the FDIC expects financial institutions to follow in connection with deposit advance products in order to effectively mitigate potential legal, reputational, consumer protection, compliance, and credit risks. The proposal discusses supervisory expectations for the use of deposit advance products, including underwriting and credit administration policies and practices. The proposal supplements existing FDIC guidance on payday loans and subprime lending.
The OCC has also issued proposed guidance similar to the FDIC guidance.