New guidelines encourage banks to offer safer alternatives to payday loans

Inside Subprime: May 29, 2018

By Lindsay Frankel

The Office of the Comptroller of the Currency (OCC) has a new policy for banks looking to provide short-term loans to customers with bad credit. Announced Wednesday, the new guidelines encourage banks to provide services that would make them viable competitors to high-interest payday lenders.

In 2013, the Obama administration issued guidelines that suggested banks avoid short-term loans to borrowers with bad credit because these high-risk customers would be unlikely to pay back loans on time, causing further financial distress on both an economy that was just bouncing back from a recession, and the consumers themselves. But current Trump-appointed Comptroller of the Currency Joseph Otting recently pointed out that payday lenders are far more dangerous than banks when it comes to landing borrowers in a debt trap.

“When banks offer products with reasonable pricing and repayment terms, consumers also benefit from other services that banks regularly provide, such as financial education and credit reporting,” said Otting.

Payday loans cause financial harm to many low-income families, and many politicians from both sides of the political spectrum have criticized payday lenders for their disreputable business practices and high interest rates. Payday loans in Ohio, for example, charge borrowers an average annual interest rate of 569 percent, and Ohio is just one of many other states which allow predatory interest rates on short-term loans.

In the payday lending industry, hidden fees, confusing terms, account overdrafting, and harassing borrowers are not uncommon.

In contrast, the OCC policy urges banks to inform borrowers “in a transparent, accurate, and customer-friendly manner.” The guidelines also advise banks to adhere to consumer protection laws and use “timely and reasonable workout strategies” to avoid excessive fees that can trap borrowers in debt.

Bank lobbying groups recognize the demand for short-term loan products and praised the new OCC policy. Virginia O’Neill of the American Bankers Association’s Center for Regulatory Compliance told reporters, “We appreciate that the principles outlined in the bulletin are not prescriptive and encourage banks to design their own underwriting and product features that promote access and treat customers fairly.”

Consumer Financial Protection Bureau Director Mick Mulvaney, who has taken action to loosen the restrictions on payday lending, was also in support of the OCC policy.

“In any market, robust competition is a win for consumers,” said Mulvaney. “The Bureau will strive to expand consumer choice, and I look forward to working with the OCC and other partners on efforts to promote access and innovation in the consumer credit marketplace.”

The regulatory go-ahead could provide safer small-dollar loan options to subprime borrowers, but the move towards deregulation of the payday lending industry leaves borrowers who are unaware of the dangers of payday loans without protection from the law. Short-term loan customers need to be aware of all the options available to them in a time of need. Soon, customers who were previously unbanked or underbanked may have access to bank loans and the education they need to build their credit.

To learn more about payday lending in the United States, check out these related pages and articles from OppLoans:


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