Regulators Take Aim At Bank Payday Loans

Major banks are pushing back on regulators looking to impose stricter rules on short-term, high-interest loans for consumers. 

Such is the finding of a new report by The Wall Street Journal, which chronicles the battle between banks and regulators over “deposit-advance,” “payday” and other small loans that some feel put consumers at a disadvantage.

The Consumer Financial Protection Bureau (CFPB), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp (FDIC) are three such regulators looking to get tough on small loans. And big banks are now firing back.

Wells Fargo, cited as the largest bank to offer “deposit-advance loans,” told regulators it will be forced “to discontinue the Direct Deposit Advance Service” if new proposals are passed, “leaving many customers only more expensive alternatives.”

The WSJ report also cites U.S. Bancorp and Regions Financial as FIs that have warned regulators to back off, claiming that new rules would reduce the availability of credit to their consumers.

Regulatory attention towards payday lenders began in earnest in late April, when the CFPB issued this report largely painting such loans in a negative light.

“It appears that these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB wrote in their conclusion.

“However, these products may become harmful for consumers when they are used to make up for chronic cash flow shortages.”

Just one week later, the Community Financial Services Association of America (CFSA) – a trade group that represents payday lenders – fired back at the CFPB, condemning the report as “narrow” and incomplete.”

“It appears as though the Bureau bases its findings on narrow examinations of a small segment of the industry and conjectures about credit alternatives for consumers without consideration of the impact varying state laws and regulations would have on the data,” Dennis Shaul, CEO of the CFSA wrote in his letter.

The debate over whether payday and short-term loans are dangerous for consumers is not new. As the WSJ report notes, deposit-advance loans usually allow customers to request an advance of up to $500, but can come with an annual interest rate of 120 percent. Payday loans can come with annual interest rates of as high as 500 percent, and the mean payday loan borrower spends 196 days of the year in debt, according to the CFPB.

However, many who take out payday and short-term loans praise the financial tools for getting them through emergency situations.

For example, the WSJ report quotes two consumers who credited such loans with helping them navigate a medical crisis and college costs, respectively.

“We think we introduced a responsible service that helps do what we intended and that is to help customers get through an emergency situation,” a Wells Fargo spokesperson told the WSJ.

What do you think? Do you view short-term loans as necessary financial crutches, or are they too dangerous for many consumers to use properly? Let us know in the comments below.

And to read the full Wall Street Journal report, click here.