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Deposit advance: ‘Serious risks’

By Marcie Geffner · Bankrate.com
Tuesday, May 7, 2013
Posted: 5 pm ET

The Consumer Financial Protection Bureau isn't the only federal agency taking a hard look at bank deposit advance loans.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have issued proposed supervisory guidance for FDIC-supervised financial institutions that offer or might consider offering these products, which oftentimes are essentially identical to payday loans.

The proposed guidance is intended to make sure banks understand the safety, soundness, compliance and consumer protection risks associated with these products, and explore how the FDIC expects banks to mitigate these and other risks.

In a statement, FDIC Chairman Martin J. Gruenberg says the proposed guidance "reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers."

"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," Gruenberg says.

The proposed guidance will be published in the Federal Register with a 30-day comment period, according to an FDIC statement.

A recent CFPB study found borrowers like direct deposit advances but often become trapped into cycles of multiple loans, overdraft fees and high costs associated with these products.

Sixteen consumer advocacy groups issued a joint statement lauding the study and the FDIC-/OCC-proposed guidance. The groups included The Greenlining Institute, the Interfaith Center on Corporate Responsibility, the Center for Responsible Lending, the Consumer Federation of America, the National Consumer Law Center and the National Council of La Raza.

"Requiring banks to assess a borrower’s ability to repay and make loans that borrowers can afford to repay is just common sense," the groups say. "It is also a fair directive, since banks have received generous government support and currently borrow money themselves from the government at close to zero-percent interest."

Do you think the government needs to take a larger role in protecting consumers from lending instruments such as payday loans?

 

Follow me on Twitter: @marciegeff.

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