Direct deposit loans are structured much like payday loans — offering short-term, high-cost advances to help consumers get through to their next paycheck.
The big difference is that major banks offer direct deposit loans only to their account holders. Payday loans are typically offered to any consumer meeting basic qualifications.
Direct deposit loans from banks are generally small-dollar, short-term advances offered to bank customers through automatic deposits to customer accounts. Typically, account holders take out a loan and when their next direct deposit is credited to their account, the loan is repaid through automatic deduction from the account.
The Consumer Financial Protection Bureau regulates payday loans but until now, there has been little regulation over banks offering direct deposit loans.
Federal regulators are putting banks on notice that they’re on the lookout for predatory direct deposit loans.
The Federal Deposit Insurance Corporation (FDIC) and the Office of Comptroller of the Currency (OCC) each issued guidance on deposit advance products information financial institutions they will be monitored for “potential credit, reputation, operational, and compliance risks.”
Regulators have previously issued similar guidance on payday and subprime loans.
“The OCC will take appropriate action to prevent harm to consumers, ensure compliance with applicable laws, and address any unsafe or unsound banking practice or violations of law associated with these products,” according to a notice issued by the agency.
Consumer watchdog agencies praised the guidance as they have been sounding the alarm on banks issuing “predatory” loans with interest rates as high as 300 percent that can trap borrowers in a cycle of debt.
“This is what it looks like when regulators get it right,” National People’s Action (NPA) executive director George Goehl said. “Preceding this guidance, too many big banks have been issuing payday loans with triple-digit interest rates that prey on some of our nation’s most vulnerable people.”
A survey on payday loans released earlier this year by the Pew Charitable Trusts found that 72% of borrowers believed more regulation of the industry was needed, though 48% said they thought payday loans help borrowers more than they hurt them.