Banks want reassurance about payday loans
Some banks are keen to resume offering short-term, low-value loans to cash-strapped customers. Regulators, too, are keen on banks providing more emergency consumer credit.
Loans of up to a few thousand dollars can help consumers cover bills, car repairs, or other emergency expenses. They would also prevent some of the bank’s customers from going to other payday lenders or other lenders.
The problem is that banks fear that without an explicit blessing for such loans, they may be subject to future regulatory measures. So, for now, many are lagging behind despite recent encouragement from Trump-appointed regulators.
Critics argue that these products are akin to payday loans, which are often viewed as predatory due to the high interest rates. And regulators have already viewed the company negatively. In 2013, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. imposed severe restrictions that virtually wiped out the product in most banks.
Last year, the OCC changed its policy, encourage banks to offer loans, generally in the range of $ 300 to $ 5,000, to be repaid over two to 12 months. The FDIC is spearheading a joint agency effort to deliver similar guidance to all banks and has shared written drafts with the Federal Reserve and OCC, FDIC President Jelena McWilliams said.
Regulators hope these efforts will be enough to reassure banks, especially since about a third of middle-class American adults could not afford a surprise $ 400 expense, according to Fed data.
“The reason why the banks did not go back to it is because we did not propose an interagency position,” she added. McWilliams said at a press conference Thursday. “Honestly, I don’t think the banks are going to be, I don’t mean brave enough, but frankly, certain enough to move forward without some sort of stable document.”
Meanwhile, the Consumer Financial Protection Bureau cancel a rule of 2017 which imposed strict underwriting standards for short-term loans. This could remove a major regulatory hurdle for banks and others to offer high interest, low cost loans.
The softer tone of regulation has led a small group of banks to expand their consumer credit offerings recently, including
The US Bank’s new short-term loans charge $ 12 for every $ 100 borrowed, to be repaid within three months. The loans have an effective annual rate of 71%, which is lower than the usual payday rates which can go up to 400%.
Yet many large and medium-sized banks remain hesitant. They fear that the regulatory pendulum will return under future administrations, calling into question the loans they have granted.
The Bank Policy Institute, an industry group that represents major banks and regional banks, has held calls in recent months to discuss parameters for lending products to potentially present to regulators for more certainty.
Banks are considering asking for a so-called no-action letter from regulators, including the CFPB.
This would provide assurance that lenders would not be subject to fines or other enforcement actions for a given type of product, industry representatives said.
“Banks need to know what the rules of the road are. Developing a product does not make sense if it subjects banks to regulatory risk. And it hurts millions of consumers, ”said Alex Horowitz, senior researcher at The Pew Charitable Trusts, who advocated for banks to make installment loans of $ 400 over three months costing $ 50 or $ 60.
Other consumer advocates oppose the concept of a regulatory nod, saying bank branches should remain strict on low-value, high-interest loans. Unlike other lenders, domestic banks are often exempt from state interest rate limits.
“It’s a no-get-out card,” said Ed Mierzwinski, director of the federal consumer program at the US Public Interest Research Group. “It could allow banks to provide payday loans that are not much different from our current payday loans.”
Regulators have suggested that allowing banks to offer low-value loans could steer customers away from less regulated payday lenders. But they don’t necessarily see the need for greater regulatory tolerance.
By adhering to the OCC’s guidelines on small dollar lending, banks can offer short-term and small-dollar loans “responsibly and avoid the perceived need for letters of no-action,” said Joseph Otting, director of the OCC, in a press release. A declaration.
Write to Lalita Clozel and lalita.clozel. @ Wsj.com
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