The following article is by BY JESSICA SILVER-GREENBERG
Federal regulators are poised to crack down on payday loans — the short-term, high-cost credit that can mire borrowers in debt. But instead of taking aim at storefront payday lenders, the banking authorities are focusing on the small operations’ big bank rivals, like Wells Fargo and U.S. Bank, according to several people briefed on the matter.
A handful of banks offer the loans tied to checking accounts, with the understanding that the lender can automatically withdraw the loan amount, plus the origination fee, when it is due.
Regulators from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are expected to clamp down on the loans, which carry interest rates that can soar above 300 percent, by the end of the week, these people said.
The F.D.I.C. and the comptroller’s office declined to comment.
The regulators are expected to impose more stringent requirements on the loans. Before making a loan, for example, banks will have to assess a consumer’s ability to repay the money.
Banking authorities are also expected to institute a mandatory cooling-off period of 30 days between loans — a reform intended to halt what consumer advocates call a debt spiral of borrowers taking out fresh loans to cover their outstanding debt. As part of that, banks will not be able to extend a new loan until a borrower has paid off any previous ones.
Another requirement, the people said, will address marketing. Because the advances are not typically described as loans, the interest rates are largely opaque to borrowers. Wells Fargo, for example, charges $1.50 for every $20 borrowed. While the bank’s Web site warns that the products are “expensive,” there is no calculation of an interest rate. The banking regulators will require that banks disclose the interest rates, according to the people familiar with the guidance.
Some of the guidelines would hew closely to mortgage rules already required under the Dodd-Frank financial overhaul law. Under the law, lenders have to calculate a customer’s ability to shoulder the principal and interest payments over the life of a mortgage.
The loans have proliferated since the financial crisis, according to consumer advocates — spurred in part by banks’ aggressive search for fresh revenue after losing billions of dollars in income from regulations that restrict fees on debit and credit cards.
Banks deny that the loans are predatory and point out that lenders are simply catering to demand from consumers.
“Checking Account Advance gives customers access to funds for use in case of an emergency, with transparent pricing and safeguards and cooling-off periods built in to help customers avoid becoming overextended,” said Teri Charest, a spokeswoman for U.S. Bank.
Richele J. Messick, a Wells Fargo spokeswoman, echoed that position. “The loan is designed to help customers through an emergency situation,” she said.
For low-income consumers, the loans can result in a torrent of overdraft charges and fees. Borrowers who take out payday loans are roughly two times as likely to be hit with overdraft fees, according to a March report by the Center for Responsible Lending, an advocacy group.
The impact of the loans can be devastating for seniors, according to the report, because Social Security and disability payments deposited directly into checking accounts can be siphoned to satisfy fees incurred by the loan.
Annette Smith, 69, a retired caretaker in Rocklin, Calif., said she had been ensnared by the loans since she borrowed $500 more than five years ago against her Wells Fargo checking account.
She vows every month to never take out the high-cost credit again, she said, but each month a slew of bills undermines that promise. To cover the cost of the loan, the bank draws from Ms. Smith’s Social Security income after her benefits of about $1,200 a month are deposited in her account.
“This is predatory lending, plain and simple,” Ms. Smith said.
The move by regulators is the latest salvo in a push against the loans. On Wednesday, the Consumer Financial Protection Bureau issued a report that found the payday and direct-deposit loans could transform from short-term credit into a long-term burden. “For too many consumers, payday and deposit advance loans are debt traps,” Richard Cordray, the agency’s director, said in a statement.
Last May, the F.D.I.C. said the agency was “deeply concerned” about payday lending. The comptroller’s office said in June 2011 that the loans increased “operational and credit risks and supervisory concerns.” Lawmakers, led by SenatorJeff Merkley, Democrat of Oregon, are also looking to rein in payday loans. In July, he introduced a bill that would force payday lenders to abide by state usury caps where the borrower lives.
“Payday lending and other predatory loans strip wealth from working families,” Mr. Merkley said.
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