Federal bank regulators moved Thursday to clamp down on the deposit advances banks offer, a first step in what’s expected to be a broader crackdown on the country’s multibillion-dollar payday loan industry.

Although most people associate high-interest, fast-cash payday loans with check-cashing shops on the street or online, a handful of commercial banks, notably Wells Fargo & Co. and U.S. Bancorp, offer similar advances on paychecks or Social Security checks, for instance. The loans are pitched to people with existing accounts as a handy help for financial emergencies and a way to avoid overdrafts.

Consumer advocates have protested that the bank products are no different from the payday loans on the street, which they view as predatory products that catch vulnerable consumers in a churn of repeat borrowing that’s tough to break.

On Thursday, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued a 21-page guidance document seeking to rein in the products and establish a clear ability-to-repay standard. Although relatively few commercial banks offer the products, many have been eyeing them as they seek new revenue sources.

“The proposed supervisory guidance released today reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers,” FDIC Chairman Martin Gruenberg said in a news release. “Many financial institutions already profitably offer affordable small-dollar loans as an alternative to high-cost payday loans, and we encourage institutions to continue to seek ways to responsibly meet the need for small loans.”

The guidance highlights several existing federal laws and regulations already governing the deposit advance loans and gives banks a stern warning to comply. It also pushes further, requiring banks to clearly disclose the costs of the loans in terms of an annual percentage rate and to develop board-approved policies on underwriting deposit advance loans.

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Among the requirements, banks would have to use adequate underwriting to determine whether a borrower has enough income to repay the loan without getting another one. There would need to be a cooling-off period of at least one monthly statement cycle between loans.

Banks would also need to repeat the underwriting before raising credit limits and re-evaluate eligibility at least every six months

The guidance isn’t final. The public has 30 days to comment.

Consumer advocates cheered. “This guidance will probably lead to the elimination of payday loans at banks,” said Nick Bourke, project director at the Pew Charitable Trusts.

Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the proposals were what her group expected and that she hopes regulators adopt them.

The Consumer Financial Protection Bureau, which supervises nonbank payday lenders, said Thursday that it supports the guidance.

 


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