Deposit-advance loans, also known as small-dollar or payday loans, can be quite risky for consumers. But could these financial products be too risky for banks as well?
The answer isn't clear. But, federal regulators have issued some new guidance for national banks and federal savings and loans that offer deposit advance products.
The new guidance from the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency addresses the risks and regulators' expectations of banks and thrifts that offer deposit advances.
Deposit advances are short-term loans for small amounts of money that banks or thrifts offer customers who make recurring direct deposits into their accounts. Financial institutions like such arrangements because they have strong assurance that the consumer will have the funds to repay the loan when the next automatic deposit drops into the account.
In a statement, Comptroller of the Currency Thomas J. Curry said the OCC "encourages banks to offer responsible products" that meet consumers' needs for small-dollar credit.
"However, deposit advance products share a number of characteristics with traditional payday loans, including high fees, short repayment periods and inadequate attention to the ability to repay. As such, these products can trap customers in a cycle of high-cost debt that they are unable to repay. As a result, they pose significant safety and soundness and consumer protection risks. Banks must understand and manage those risks, and this guidance clarifies our expectations for doing so," Curry said.
In a separate statement, FDIC Chairman Martin J. Gruenberg said the guidance "aims to alert financial institutions to the risks posed by certain deposit advance products and to encourage institutions to meet the demand for small-dollar loans through affordable products that are prudently underwritten and designed."
The guidance directs banks and thrifts to address the potential risks associated with deposit advance products and warns that government regulators will examine the financial institutions' underwriting policies and practices, reliance on fee income, compliance with consumer protection laws, management oversight and other aspects of these loans.
"The OCC will take appropriate action to prevent harm to consumers, ensure compliance with applicable laws and address any unsafe or unsound banking practice or violations of law associated with these products," the agency says.
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