WASHINGTON, D.C. – The head of the Federal Deposit Insurance Corporation (FDIC), Jelena McWilliams, is “reviewing whether to rescind guidelines for ‘deposit advance’ loans,” according to an interview she had with the Wall Street Journal. “Deposit advance” is a euphemism for bank payday loans, which – before the FDIC’s 2013 guidance – had triple-digit interest rates, lacked an ability-to-repay standard, and trapped consumers in debt. For this reason, consumer, civil rights, faith, and community groups are urging the FDIC Chair to keep in place the agency’s guidance advising ability-to-repay determinations on such loans. A copy of the letter is included at bottom and linked here.
Center for Responsible Lending (CRL) Senior Policy Counsel Rebecca Borné said, “Bank payday loans offer a mirage of respectability, but in reality, they are financial quicksand. The FDIC has a responsibility to protect consumers from being pulled into these debt traps and to protect banks from a race to the bottom.”
The letter states, in part, that the “data on bank payday loans made indisputably clear that they led to the same cycle of debt as payday loans made by non-bank lenders…. [They] drained roughly half a billion dollars from bank customers annually. This cost does not include the severe broader harm that the payday loan debt trap has been shown to cause, including overdraft and non-sufficient funds fees, increased difficulty paying mortgages, rent, and other bills, loss of checking accounts, and bankruptcy…. Payday lending by banks was met by fierce opposition from virtually every sphere – the military community, community organizations, civil rights leaders, faith leaders, socially responsible investors, state legislators, and members of Congress.”
The coalition’s letter also calls for the FDIC to ensure small dollar installment loans are capped at 36% or less and to prevent bank partnerships that evade state interest rate limits
Additional Background:
The data on bank payday loans are clear: They were harmful to consumers as well as to banks’ reputations and safety and soundness. Deposit advance borrowers were seven times more likely to have their accounts charged off than their counterparts who did not take deposit advance loans. Moreover, these loans did not “protect” bank customers from overdraft fees: former borrowers, compared to non-borrowers, did not incur an increase in overdraft or NSF fees when deposit advance was discontinued.
This letter is the latest in a series of warnings from a broad coalition concerned about high-cost bank loans. In October of 2017 after the OCC rescinded its guidance on bank payday loans, groups wrote to banks urging them to stay away from this usury. In May, groups wrote to regulators urging them to keep or reinstate guidance preventing the reemergence of bank payday loans, and then forwarded this letter to banks warning them of the reputational risk of bank payday loans.
Full text of the letter, including signatories and endnotes: