Regulators charge that the loans are often issued without regard to a lender's ability to repay and come with high fees, adding that lenders can be obligated to repay the loan before making other payments.
"The proposed supervisory guidance released today reflects the serious risks that certain deposit advance products may pose to financial institutions and their customers," said FDIC Chairman Martin Gruenberg in a statement.
The proposals outline a set of principles the government expects financial institutions to adhere to, and warns that deposit advance loans must conform to various existing federal laws, including prohibitions against deceptive practices and lack of disclosure.
Banks are advised to be sure borrowers can repay the loan, limit loans to one per month and not automatically raise a borrower's credit limit. They are also told to monitor for repeated use of deposit advance loans.
"The FDIC will take appropriate supervisory action to prevent harm to consumers, to address any unsafe or unsound banking practices associated with these products, and to ensure compliance with all applicable laws," the agency warned in its proposal.
Consumer advocacy organizations praised the proposed guidelines.
"Requiring banks to assess a borrower’s ability to repay and make loans that borrowers can afford to repay is just common sense," said a joint statement from officials representing 16 groups, including the NAACP, National Council of La Raza and Center for Responsible Lending. "It is also a fair directive, since banks have received generous government support and currently borrow money themselves from the government at close to 0% interest."
"These products aren’t much different from other payday loans out there," added a statement from Sen. Jack ReedJack ReedSunday shows preview: McMaster hits circuit for second straight week The Hill's 12:30 Report Easy accessibility of voter registration data imperils American safety MORE (D-R.I.), who urged the Federal Reserve to follow suit in cracking down on the short-term loans.
"We need to increase transparency and strengthen lending practices to safeguard both consumers and the banking system from risky products that may cause more harm than good."
On Wednesday, the Consumer Financial Protection Bureau issued a report that found that deposit advance and payday loans could "put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden," according to Director Richard Cordray.