The combination of a high cost product and short repayment period creates in the Agencies’ view

Protection and Soundness Factors

The combination of a high cost product and short repayment period creates a risk of some customers becoming trapped in a cycle of high cost borrowing over an extended period of time in the Agencies’ view. [v] This cycle, named “churning” of loans, is characterized by the Agencies as “similar to” the practice of “loan flipping,” which they usually have formerly defined as a feature of predatory financing. [vi] The Agencies suggest that the look among these services and products usually results in such consumer behavior and it is “detrimental to” the consumer. Although so called “cooling off” durations, this is certainly, minimal times imposed between deposit advances, have now been instituted by some banking institutions, the Agencies find the present types of such plans become “easily prevented” and “ineffective” in preventing duplicated usage.

The Agencies keep in mind that because clients using DAP usually have income problems or blemished credit records, such loans provide a heightened credit danger to lending banks. Failure to take into account adequacy of earnings sources to pay for living that is ordinary along with other financial obligation of such clients prior to making duplicated deposit advance loans presents safety and soundness issues. Included in these are clouding the performance that is true delinquency status for the loan portfolio and heightened standard risk. These underwriting shortcomings are addressed when you look at the modifications mandated by the proposed Supervisory Guidance.

Reputational risk is presented by negative news protection and scrutiny that is public of loans. The perception that DAP are unjust or harmful to clients can lead to both reputational harm and direct appropriate danger from personal litigation and regulatory enforcement actions.

The Agencies additionally highlight the participation of alternative party contractors into the development, servicing and design of DAP made available from some banking institutions.