U.S. financial regulators warned banks to boost underwriting standards and oversight of short-term, small-dollar loans that could lead some borrowers to become buried in debt.
Some banks, including Wells Fargo and US Bancorp, offer products known as deposit advances, which are small loans that are repaid out of direct deposits into the customer's account. Such loans are typically used by lower-income borrowers who live paycheck to paycheck.
Consumer advocates say banks extend such loans, which resemble traditional payday loans in that they are repaid quickly and typically carry high fees, without adequately considering whether consumers can afford to repay them.
That can force some borrowers to rack up short-term loans, consumer groups and regulators say.
The Office of the Comptroller of the Currency said in new guidance released on Wednesday that banks could suffer reputation risks or safety and soundness concerns if their customers frequently misuse deposit advance products.
U.S. regulators have been keeping an eye on short-term credit products for some time. The Consumer Financial Protection Bureau said in a report on Wednesday that payday loans and deposit advances can trap borrowers in a cycle of debt.
The bureau warned it was considering new rules for such products.
The OCC, which oversees national banks, said in its new guidance that banks it supervises that offer deposit advances need to ramp up underwriting standards for short-term loans and improve oversight of the borrowers who use them.
It said it would look at deposit advance programs during bank examinations.
"The OCC continues to encourage banks to respond to customers' small-dollar credit needs," the agency said.
"The OCC is proposing guidance to ensure that any bank offering these products does so in a safe and sound manner and does not engage in practices that would increase credit, compliance, legal, and reputation risks to the institution."
The Federal Deposit Insurance Corp put out similar guidance on Thursday for banks it regulates.
Banks must do more to make sure borrowers can repay loans, enforce "cooling-off periods" that block consumers from taking out a loan right after paying off an old one, and monitor customers for repeated use of deposit advances, regulators said.
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