By Charlene Crowell | SACOBSERVER.COM WIRE SERVICES

(NNPA) - A key federal regulator was challenged last week by the Center for Responsible Lending to take actions in defense of consumers as major banks begin offering payday loans. According to a new report by the nonpartisan research and policy organization, the Office of the Comptroller of the Currency has reneged on its duties to protect consumers. The absence of regulation and monitoring from OCC is the same as condoning the expansion of a short-term lending product that is known to create a debt trap for borrowers, according to CRL.

Established in 1863 as a bureau of the U.S. Treasury Department, OCC is charged with conducting reviews of national banks and supervision of bank operations, including compliance with consumer banking laws like the Community Reinvestment Act. Most importantly, OCC has the authority to take action for non-compliance as well as the ability to issue rules and regulations on bank lending and other practices.

However, in its independent review of bank activity, CRL determined that OCC has been silent as some major banks are now offering their own version of payday loans.
Perhaps the lack of regulatory enforcement is tied to how OCC is funded. According to the agency’s own website, “OCC does not receive any appropriations from Congress. Instead, its operations are funded primarily by assessments on national banks.

National banks pay for their examinations, and they pay for the OCC's processing of their corporate applications. The OCC also receives revenue from its investment income, primarily from U.S. Treasury securities.”

As OCC turns a blind eye to bank payday loans, the product has the potential to wreak more financial havoc to households already in financial straight jackets. Like traditional payday stores, bank payday loans are small dollar ones, often $500 or less. The important difference is that accountholders using bank payday loans must be fully repay the loan with their next direct deposit. The bank payday product fee also carries an annual percentage rate (APR) fee of 120 percent. If the loan leaves a balance that cannot cover other expenses, accountholder are prone to take out back-to-back loans and remain indebted for a significant time – just like a payday store loan.

CRL found that OCC regulatory lapses included:

• Allowing nationally chartered banks to evade state law and offer high-interest payday loans directly to consumers. Years ago, the OCC cracked down on bank partnerships with payday lenders, citing concerns about “safety and soundness, compliance, consumer protection, and other risks to banks.” Yet the OCC allows the banks it oversees to make the same type of loans directly.
• Allowing national banks to market payday loans to account holders as a way to return accounts to good standing after overdraft charges are assessed, thus encouraging repayment of one high-cost debt with another.
• Allowing banks to unfairly increase overdrafts charges—which have shot up 35 percent in just two years and now cost Americans $24 billion per year—even though the OCC determined that these practices were a problem for consumers as early as 2001.
• Failing to investigate whether banks’ payday loans and abusive overdraft programs violate anti-discrimination and fair lending laws.

CRL predicts that unless the OCC and other bank regulators curb bank payday loans immediately, this unsafe product will likely spread throughout the banking industry as swiftly as overdraft abuses have.

In reaction to the new report, several civil rights leaders are speaking to the particular impact of these loans to communities of color.

“These reports reveal the inadequacy in our current system of oversight,” said Gary Flowers of the Black Leadership Forum. “Unfair overdrafts and bank payday loans strip working people of their hard-earned funds. Given the state of our economy, one would think we could expect some real reform now. Instead, we see a national bank regulator stepping back and letting more unjust practices spread through the banking system.”

According to Julian Bond, former chairman of the NAACP, “A drive through minority neighborhoods clearly indicates that people of color regardless of income are a target market for legalized extortion. Payday lending is an economic drain that threatens the livelihoods of hardworking families and strips wealth from entire communities.”

“High bank fees and abusive practices not only disproportionately affect communities of color” said Janis Bowdler, Deputy Director of the Wealth-Building Policy Project at the National Council of LaRaza, “but they drive families away from mainstream banking system. Instead, OCC should be focused on how to connect the unbanked with sustainable bank products.”

Included among the corrective actions recommended by are:

• OCC investigate the impact of bank payday loans on borrowers of color and take appropriate enforcement action where it finds violation of fair lending laws;
• Ensure borrowers are only offered loans that can be repaid without being trapped in long-term debt; and
• Assess how bank payday loans and other loan products align with the affordable small-dollar guidelines set by the FDIC that includes a rate cap at or below 36 percent APR.

The new report is available online at: http://www.responsiblelending.org/payday-lending/policy-legislation/regulators/mainstream-banks-making-payday-loans.pdf

Charlene Crowell is CRL’s Communications Manager for State Policy and Outreach. She can be reached at Charlene.crowell@responsiblelending.org.