Regulators warn banks on ‘payday loans’

U.S. financial regulators are putting banks on notice that they’re on the lookout for predatory practices involving high-interest deposit advance products often described as “payday loans.”

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The Federal Deposit Insurance Corporation (FDIC) and the Office of Comptroller of the Currency (OCC) each issued guidance informing financial institutions that they will monitor the services for “potential credit, reputation, operational, and compliance risks." 

“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,” according to a notice issued by the agency.

The guidance targets small-dollar and short-term credit services that banks offer to customers paid through automatic deposits to the accounts. Typically, customers may take a loan to be repaid when their next check comes into the account.

The guidance won praise from consumer watchdogs, who said it would rein in banks from issuing “predatory” loans with interest rates as high as 300 percent that can trap borrowers in a cycle of debt.

"This is what it looks like when regulators get it right,” National People’s Action (NPA) executive director George Goehl said. “Preceding this guidance, too many big banks have been issuing payday loans with triple-digit interest rates that prey on some of our nation’s most vulnerable people.” 

But the NPA, along with the group Americans for Financial Reform, said a third regulator is conspicuously absent from the crackdown.

“Now it’s up to the Federal Reserve to follow the OCC’s and FDIC’s lead with the institutions it regulates,” said Lisa Donner, AFR’s executive director.

This week’s action, announced Thursday, came a day after the Consumer Financial Protection Bureau ordered one of the country’s largest payday lending companies to pay fines and refunds totaling $19 million over charges it abused customers and destroyed documents.

Cash America facilities had been ignoring due diligence rules for five years, the CFPB said.