The FDIC, the regulator most familiar to consumers as the insurer of their bank deposits, now wants to make sure that lenders don’t take advantage of customers seeking short-term cash with products that are similar to payday loans.

FDIC Tightens Oversight of Costly Deposit Advance Loans

FDIC Tightens Oversight of Costly Deposit Advance Loans

FDIC Tightens Oversight of Costly Deposit-Advance LoansThe FDIC, the regulator most familiar to consumers as the insurer of their bank deposits, now wants to make sure that lenders don’t take advantage of customers seeking short-term cash with products that are similar to payday loans.

The Federal Deposit Insurance Corporation Thursday proposed new “supervisory guidance” to FDIC-insured financial institutions that offer or may consider offering so-called deposit advance loans.

The OCC (Office of the Comptroller of the Currency) also issued similar guidance Thursday as a regulator over national banks and federal savings associations.

Deposit advance loans amount to small-dollar, short-term credit that some banks offer to customers maintaining a deposit account, reloadable prepaid card, or similar deposit-related product.

The customer takes out a loan, which is to be repaid from the proceeds of their next direct deposit. These loans typically have high fees, are repaid in a lump sum in advance of the customer’s other bills, and often do not utilize fundamental and prudent banking practices to determine the customer’s ability to repay the loan and meet other necessary financial obligations.

(Read more: Payday, Deposit-Advance Loans Can Become Debt Traps, CFPB Says)

“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.

The proposal, which won’t take effect until it goes through a customary public feedback period, details the principles that the FDIC expects financial institutions to follow.

The guidance focuses on supervisory expectations for the use of deposit advance products, including underwriting and credit administration policies and practices. The proposal supplements existing FDIC guidance on payday loans and subprime lending.

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.”

Many lenders already profitably offer affordable small-dollar loans as an alternative to higher-cost payday loans, Gruenberg said.

The FDIC has to weigh the demand for such loans against possible violations of consumer protection rules.

 

 

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