Consumers who rely on payday loans to fill their budget gaps may have a new option to turn to: traditional banks.
National banks have just received the green light to serve this market from their regulator, the Office of the Comptroller of the Currency.
Currency Comptroller Joseph Otting on Wednesday called on national banks and federal savings associations to enter the market for short-term, small-installment loans.
These loans typically range from $ 300 to $ 5,000, which is roughly $ 90 billion in loans taken out each year by millions of American consumers.
“Consumers should have more secure and affordable choices, and banks should be part of that solution,” Otting said in a statement.
Letting banks offer these types of loans will give consumers more choice, who often turn to payday loans to make up for lack of personal cash.
“The OCC announcement gives banks the regulatory certainty they need to offer small loans,” said Alex Horowitz, senior research manager for the consumer credit project at Pew Charitable Trusts. “It’s a big problem.”
Unlike payday loans, which are usually due all at once with the next paycheck, short-term, low-value loans would give consumers two to 12 months to pay off their balance in installments, according to Horowitz.
Short-term loans usually come with a two-digit annual percentage rate, compared to the three-digit APR that payday loans typically charge.
“This is good news for consumers,” said Horowitz. “For a typical payday loan borrower, using a loan like this from a bank would save them hundreds of dollars a year.”
The go-ahead from the OCC is a key development following the authorization that the Bureau of Consumer Financial Protection granted to banks and credit unions to provide these loans last October. The green light from the CFPB also came with a condition – that consumers have at least 45 days to repay the loans.
Financial institutions needed the approval of their respective regulators, including the OCC, in order to follow through on the CFPB’s decision.
The OCC mainly supervises the big banks. This means that other financial institutions wishing to embark on this loan, such as regional banks, small banks and credit unions, would need the approval of their respective regulators, including the Federal Reserve, Federal Deposit Insurance. Corporation and the National Credit Union Administration.
Thursday, the National Credit Union Administration proposed a new rule to relax some regulations on small loan programs, which would make it easier for credit unions to offer these loans, Horowitz said.
The FDIC may also choose to reassess the rules for offering this type of loan to the small banks it regulates once it comes under new management.
Another proposal to make payday loan type loans more common was introduced by Senator Kirsten Gillibrand, DN.Y., in April. Gillibrand proposed that the Postal Service could begin offering retail banking services, including low-value loans with low fees and interest rates.
Otting’s statement acknowledges that banks may not be able to service all of this large market.
Some industry experts question whether operating in the small loan arena will be profitable enough for banks.
“In the past, banks have tried to offer these loans and found them unprofitable,” Dennis Shaul, CEO of the Community Financial Services Association of America, said in a statement. “In 2009, for example, the FDIC tested a small dollar loan pilot program to explore the viability of banks offering small dollar loans. The banks stopped offering these loans because they were not viable.
But banks could operate profitably in this space if they take advantage of technological advancements that have occurred over the past decade, Horowitz said.
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That would mean using an automated underwriting, or algorithm to determine a borrower’s eligibility and provide an immediate decision, instead of having a bank employee make that decision. Banks are also expected to provide these loans through online or mobile banking.
The demand for these bank loans from the consumer side is there, Horowitz said. Of the 826 payday loan borrowers surveyed by Pew, 81% said they would rather borrow from a bank or credit union rather than a payday lender.
A new study released Thursday by consumer credit reporting company TransUnion supports the idea that traditional lenders can find suitable loan candidates among this population.
TransUnion analyzed consumer activity in its alternative loan database, including short-term and installment loans.
His research revealed that there is a large population of those non-subprime borrowers, the ones with the highest loan risk.
“There is a perception that they are all either unbanked or high risk, and that is not true,” said Elizabeth Pagel, vice president of market strategy and consumer loans at TransUnion. . “There is a lot of diversity in this population.
The OCC argues that if banks offer these short-term loans to consumers with low credit scores, it can help integrate them into the traditional banking system and avoid getting trapped in high debt.
Despite low credit scores, other factors, such as how long a customer has been in a bank and the regularity with which they make deposits to their accounts, can make them good candidates for short-term loans. Horowitz said.
“They are probably good candidates to pay off the loan because they are stable and show a relationship with the bank,” Horowitz said. “The fact that they have a low credit rating shouldn’t prevent them from being able to borrow.”