The following is from an editorial in The New York Times:
Banking regulators put the finishing touches on rules designed to rein in short-term consumer loans from banks that are as dangerous to consumers as predatory loans from payday lenders.
Payday lenders have notoriously marketed themselves as a harmless option for people who need small loans they hope to repay quickly. The industry earns considerable profits from borrowers who cannot afford to repay the original loan and must renew the loan again and again. These borrowers end up in debt for months, saddled with loans that can carry an interest rate of 400 percent or more.
The banking industry, which cannot resist such easy profits, offers "deposit advance" loans that work the same way. There is no fixed date for repayment, but the bank repays itself from the borrower's account. A study found that these transactions were eating customers alive. Moreover, three-quarters of the loan fees came from consumers who borrowed more than 10 times within 12 months.
New guidelines issued by the federal government stop short of completely disallowing deposit advances but should reduce the banks' profits while making the loans less onerous to borrowers.
Banks will have to determine if the borrower has the ability to repay. Banks will be barred from making more than one loan per monthly statement cycle and from extending a new loan before the previous one has been repaid. Banks will have to furnish the borrower with clear and accurate terms.
The Federal Reserve, which oversees other banks that practice this brand of lending, cautioned those banks about risks posed by those loans, but it did not issue rules to make them less onerous. It should do so now, following the example set by fellow regulators.