U.S. Bank, the country’s largest regional bank, began taking advantage of a roll-back of OCC regulations that prohibited banks from offering deposit advance products. According to the LA Times, a U.S. Bank customer with a checking account open for more than 6 months, and a direct deposited paycheck can apply online and if approved, be granted a loan of between $100 and $1,000, within minutes. Repayment, which must be within three months, comes with an interest rate of $12 per $100 borrowed, which calculates to nearly a 71% annualized interest rate. U.S. Bank is just the first of what is expected to be a wave of banks providing competition to payday lenders. What changed to bring this on?
Late 2013, both the OCC and the FDIC issued guidance that effectively precluded banks from offering deposit advance products. A deposit advance product is defined as a small-dollar, short-term loan or line of credit that a bank makes available to a customer, and which is to be repaid from the proceeds of the next direct deposit. The problem with this type of loan is that people with little or no savings, faced with financial hardship, will not likely be able to pay back the loan amount without still needing the proceeds from the next paycheck. This forces the borrower into a cycle of paying back and reborrowing. The OCC intended to keep banks out of the predatory lending business, as these payday loans typically carry high rates and high risk of non-repayment. But the reality of keeping banks out of this line of business was the swelling of lenders popping up to service this need for short-term cash loans, a demand that continues to grow today. Realizing that banks are a more responsible way to serve this market, on October 5, 2017, the OCC rescinded its prior guidance, stating “As a practical matter, consumers who would prefer to rely on banks and thrifts for these products may be forced to rely on less regulated lenders and be exposed to the risk of consumer harm and expense.” The OCC doubled-down on this guidance, on May 24, 2018 issuing its Core Lending Principles for Short-Term, Small-Dollar Installment Lending, Bulletin 2018-14, in which it states that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.” The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”
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