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Regulators to Curb Big Bank Payday Lending

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Federal regulators are preparing to crack down on short-term, high-interest loans, according to recent reports from the New York Times and the Washington Post.

Storefront and online payday loan lenders will not be targeted in their new regulation. Instead, regulators are going after payday lenders’ big bank counterparts. Big banks offer short-term loans with similarly high interest rates. Wells Fargo charges $1.50 for every $20 borrowed, which can amount to a 300 percent APR.

The proposed regulation, set to be released by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. on Thursday, would potentially require lenders to verify the borrower’s ability to pay back the loan, similar to the way mortgage borrowers are vetted.

The new rules would also mandate a “cooling-off” period between loans. Borrowers would be limited to one loan during every monthly pay cycle and would be required to pay off any current advances before taking out a new loan.

Currently, bank loan borrowers fall into cycles of debt similar to those described in traditional payday loan lending. Rates are usually close to $10 for every $100 borrowed, with the principal and fees withdrawn after the borrower’s next direct deposit. When a borrower’s deposit fails to cover the balance of the loan owed to the bank, the bank withdraws everything in the account and adds on interest and overdraft fees. 

The OCC first cracked down on bank payday lending in 2000, when it stopped banks from offering payday loans. These new loans, however, are advertised as direct-deposit advances. Bank of America and J.P. Morgan Chase do not offer direct-deposit advances, but U.S. Bancorp, Wells Fargo, Regions Financial Corp. and Fifth Third Bancorp. all offer some form of these short-term loans for credit lines of up to $500 in most cases.

Banks argue that their direct-deposit advance services have safeguards in place for borrowers. For example, to qualify for Wells Fargo’s Direct Deposit Advance, a member must possess an eligible consumer checking account with the bank, and that account must receive at least one reoccurring direct deposit of $200 or more every 35 days. The account must also be in good standing.

The term “loan,” however, is generally avoided. In the direct deposit FAQs section, Wells Fargo uses loan terminology such as “borrower” and “credit,” but does not call the service a loan. “This is an expensive form of credit intended to meet short term and emergency borrowing needs,” the site reads.

In an email statement to loans.org, Wells Fargo representative Richele Messick said direct-deposit advances do not roll-over the way traditional payday loans do. Wells Fargo does not believe direct deposit advances are a form of predatory lending.

“We believe Direct Deposit Advance is a less expensive alternative to a payday loan,” Messick said.

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