On April 24, 2013, the CFPB released a white paper that raised concerns about the risks to consumers caused by sustained repeat use of payday loans. That white paper is here.
In the white paper, the CFPB used a case study of a payday loan. According to the CFPB, the median payday loan is about $350 and financial institutions typically charge about $15.00 for every $100 that the customer borrows. After interest and other fees, a $350 payday loan will cost the consumer about $450.00. And, according to the CFPB, this payday loan process occurs about 10 times per customer, resulting in an effective APR of 300%.
Yesterday, presumably in response to the white paper, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued proposed guidance to supervised institutions on “direct deposit advance products, short-term, small-dollar loans” offered to customers who use direct deposit that are repayable from the proceeds of their next direct deposit. The FDIC's proposed guidance - which is substantially similar to that of the OCC - is here. In the proposed guidance, the agencies will require banks to establish underwriting and credit administration policies and procedures to ensure that borrowers are able to repay the loans while meeting other expenses, such as food and housing, and to do so without having to borrow further funds. Such policies are to address, among other things, the length of the borrower’s deposit relationship with the bank, delinquent or adverse credits of the borrower, the recurrence of account deposits and withdrawals over a period of at least six months; and the borrower’s net account surplus or deficit at the end of each of those months. The guidance will also prohibit banks for making subsequent deposit advance loans to borrowers who have not fully repaid existing deposit advances or who have not completed a “cooling-off” period of at least one month after repaying the prior advance.
Comments on the guidance – which is substantially similar for both agencies – is due thirty days after publication in the Federal Register, which is expected next week. The Board of Governors of the Federal Reserve System (the Board) has also released a statement in response to the CFPB’s white paper. That statement is here. In the statement, the Board reminds member banks (including banks with less than $10 billion in assets) that design and offer payday loans that they must comply with applicable federal law (TILA, EFTA, TISA, ECOA), including the FTC and CFPB provisions prohibiting unfair, deceptive, or abusive acts or practices (UDAP.) It should be noted the CFPB did not propose any guidance or rulemaking with its white paper, but it has reserved the right to do so. Even if the CFPB does not do so, it would be prudent for companies subject to CFPB supervisory examinations to establish and/or review their policies concerning payday loans as it is very clear that payday lending is on the radar for 2013. Keep in mind that compliance with TILA, EFTA, TISA and ECOA may not be enough. You need to be mindful of potential UDAP issues. Because UDAP is largely undefined, the CFPB will always use it as a fall back if it cannot find any other violation. And the “payday lenders” include all banks that engage in acts that fit within the definition of payday loans.
Have a good weekend and remember that all of the prior updates are on our website, www.cfpaguide.com/weeklyupdates and you can follow me on Twitter @cfpbattorney.