All eyes have been on the Consumer Financial Protection Bureau in recent months. We’ve known they’ve taken public comment on payday advance loans and are in the process of writing new laws that would prevent these companies from gouging consumers. What we didn’t expect was FDIC to step in first with its own recommendations for tightening regulations. Does it go far enough and does it turn the CFPB efforts moot?
FDIC Familiar Acronym
Granted, most Americans are more familiar with FDIC than CFPB, but that’s only because it’s been around forever and it’s what we see everything we walk into our banks: those black and gold stickers on the door announcing the funds are FDIC insured. Now, it’s working to keep banks and other financial entities from taking advantage of consumers whose backs are against the wall and have found their only option is to turn to the fast, but expensive, payday advance products.
Here’s where it can get a bit confusing. First, the payday loans offered by third party companies to consumers with a checking account and willingness to take out these products are the ones CFPB is focusing on at this time. Meanwhile, the FDIC says its making sure traditional banks that are now offering these controversial loan products are following all of the various laws as well.
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 FDIC said in a statement. Like CFPB, it won’t take effect until it goes through a standard public feedback period, and provides clear guidance and details the principles that the FDIC expects financial institutions to follow. It appears these policies are geared towards strengthening current compliance guidance with these products.
During a presser later on Thursday, FDIC Chairman Martin J. Gruenberg said:
The proposed supervisory guidance released today reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers.
It appears as though the tag teaming effort is being conducted simultaneously so that both agencies can make the most of their respective resources moving forward.
The Federal Deposit Insurance Corporation laid it all out on Thursday when it proposed new “supervisory guidance” to those banks and companies that are FDIC insured. As we know, more and more traditional banks are seeing these types of products as significant profit opportunities and as a result, they’re in on the game as well. FDIC is concerned, and for good reason, especially considering all of the less than ideal PR that’s plagued the financial sector in recent weeks.
Meanwhile, it looks like the Office of the Comptroller of Currency is drawing its line in the sand as well. It too issued new rules for banks and federal savings entities under its regulation. Interestingly enough, these recommendations are nearly verbatim to FDIC recommendations. Deposit advance loans amount to small dollar, short-term credit that some banks offer to customers maintaining a deposit account, prepaid debit cards, or similar deposit-related product.
The customer applies for the loan, which is to be repaid from the proceeds of their next direct deposit. As we know, the trouble with these products revolves around the high fees, requirements that they are repaid in a lump sum in advance of the customer’s other bills, and often do not include fundamental and common sense banking practices to determine the customer’s ability to repay the loan and meet other necessary financial obligations. Gruenberg also points out that many lenders already profitably offer affordable small loan amounts as an alternative to the more expensive payday loans, Gruenberg said.
The FDIC is tasked with weighing the demand for these types of products with how close they are to falling out of compliance and violating the rights and protections of the consumer. The CFPB has said recently that these financial products have resulted in a “cycle of indebtedness for many consumers with loose lending standards, high costs, and risky loan structures”. It’s expected to make its recommendations in coming weeks as well. Already, it’s conducted a twelve month investigation that includes more than 15 million storefront payday loans and data from several depository institutions that offer deposit-advance products.
Both payday and deposit-advance loans are typically described “as a way to bridge a cash flow shortage between paychecks or other income,” the CFPB found. It also says the quick solution offered is troublesome because often, consumers who seek out these products can’t qualify for other solutions. The borrowers are required to repay the funds quickly, usually their next pay period and the interest rates are bordering on illegal. It’s a slippery slope and has been since these products came onto the market.
This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden,
said CFPB Director Richard Cordray.
For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates. For the consumer, this means there may not be sufficient funds after paying off the loan for expenses such as for their rent or groceries – leading them to return to the bank or payday lender for more money.
Worse, the lenders don’t take into consideration the ability or inability of consumers to repay the funds. It would appear the two government agencies are working together to cover both ends of the spectrum.
What do you think? Is FDIC doing something CFPB has already mastered? Is this another example of government excess? Share your thoughts with us – join the discussion on Facebook or leave us a comment below. We want to hear from you.