The head of the Federal Deposit Insurance Corp. said the agency is investigating the growing practice of payday lending by banks and the marketing of such short-term loans which can prove costly to cash-strapped consumers.

FDIC Probes ‘Payday’ Lending by Banks, Marketing Practices

FDIC Probes ‘Payday’ Lending by Banks, Marketing Practices

The head of the Federal Deposit Insurance Corp. said the agency is investigating the growing practice of payday lending by banks and the marketing of such short-term loans which can prove costly to cash-strapped consumers.

Martin Gruenberg, FDIC acting chairman, told Americans for Financial Reform, a consumer lobby umbrella group, that the agency is “deeply concerned” about the spread of payday lending – traditionally a practice more common to storefront businesses.

Gruenberg confirmed the investigation in a letter to the coalition of consumer groups this week.

“Typically, these loans are characterized by small-dollar, unsecured lending to borrowers who are experiencing cash-flow difficulties and have few alternative borrowing sources,” Gruenberg said. “The loans usually involve high fees relative to the size of the loan and, when used frequently or for long periods, the total costs to the borrower can rapidly exceed the amount borrowed.”

The letter was a response to a February petition that was signed by more than 200 organizations and individuals, asking the regulator to stop banks from offering payday loans. Consumer advocates also say that payday lending by banks undermines
state law that prohibits or limits such loans and violates provisions of the Military Lending Act aimed at protecting service members from payday loans.

The FDIC is also looking into concerns about a software system provider that is actively marketing a bank payday product.

“The software product is reportedly experiencing strong growth and is being marketed as a tool banks can use to boost revenue,” Gruenberg said.

Bank “payday” loan rates can be as exorbitant as their storefront counterparts, carrying an annual percentage rate (APR) of 365 percent based on the typical loan term of 10 days, according to a study by the Center for Responsible Learning that has recently gotten the attention of the Consumer Financial Protection Bureau.

The CFPB is conducting its own review of payday loan practices as it considers new regulations. But banking regulators, such as the FDIC, also have a say in the matter. The FDIC insures the bank accounts of Americans. Under financial system reform rules, the FDIC is also entrusted with winding down the largest financial institutions that may pose a threat to the U.S. economy.

More of the biggest U.S. banks are offering products to low-income customers, such as payday loans, that carry high fees and are not limited by recent reform laws.

U.S. Bank, Regions Financial and Wells Fargo are among these banks that are quickly expanding such services as they attempt to recoup revenue lost to limits on debit and credit card fees under new regulations, according to The New York Times.

“I have asked the FDIC’s Division of Depositor and Consumer Protection to make it a priority to investigate reports of banks engaging in payday lending and recommend further steps by the FDIC,” Gruenberg said in the letter.

 

 

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