DAVID GREENE, HOST:
Now, consumer advocates here in the United States are hailing yesterday's decision by federal regulators to crack down on a type of payday loan offered by some banks.
NPR's Robert Benincasa reports on these so-called deposit advances.
ROBERT BENINCASA, BYLINE: It works like this: You borrow a small amount of money from the bank for a few days or a few weeks before payday. When your paycheck or government benefit check gets deposited in your account, the bank goes in and takes back what it loaned you, plus a fee.
The problem is, many bank customers were using these deposit advances over and over, paying high fees for small amounts of money. And they found themselves unable to pay the loans back and meet their basic expenses.
Here's Lauren Saunders, from the National Consumer Law Center.
LAUREN SAUNDERS: This is a very important move by the bank regulators. It, you know, stops some of the largest banks from making 200 and 300 percent interest rate loans to consumers that really get people into a debt trap.
BENINCASA: Going forward, banks will not be allowed to let their customers take deposit advances more than once a month, or take them in consecutive months. And they'll have to make sure their customers can pay back the loans.
SAUNDERS: We're looking forward to everybody moving on, and banks developing more responsible small-dollar loan products.
BENINCASA: Bank representatives have said that deposit advances fill a need for consumers who run short of cash, and they already contain some safeguards.
The new guidelines apply to banks regulated by the Comptroller of the Currency and Federal Deposit Insurance Corp. Of six banks currently offering deposit advances, four are affected: Wells Fargo, Guaranty Bank, U.S. Bank and Bank of Oklahoma. Two others, Fifth Third and Regions Bank, are regulated by the Federal Reserve, which has not issued similar guidelines.
Still, those two could find their products reined in by the Consumer Financial Protection Bureau. That agency has found that consumers who used deposit advances did so repeatedly, prolonging their debts.
Wells Fargo, one of the larger banks offering the loans, said earlier it would stop making deposit advances if regulators went ahead with the new requirements. A spokeswoman said yesterday the bank would study the regulations before making a decision.
Robert Benincasa, NPR News, Washington. Transcript provided by NPR, Copyright NPR.