“Rent a bank” fades for payday lenders


The regulatory eye on payday loans is tightening. To this end, as reported by the Associated Press, Congress voted to overturn Trump-era regulations that allow payday lenders to circumvent state laws that cap interest rates.

In terms of mechanics, the rules, which had been put in place by the Office of the Comptroller of the Currency (OCC), came into effect late last year.

These rules enabled what is known by at least some observers as a “rent a bank” approach whereby the payday lender could partner with a bank that has a national banking charter in place. And because this charter was not tied to any state, each state’s interest rate caps would not apply to installment loans.

As reported by the Wall Street Journal, under the terms of the OCC rule, a bank or federal savings association that signs loan documents has traditionally been defined as the “real lender” – even though the loan was in fact administered by a payday lender. Essentially, we’re arguing that the non-bank loan has been covered with a “bank loan” designation, and therefore in some cases the APR taken on these loans can reach triple-digit percentage points, bypassing states like, say , California, where the maximum rate is 24%, as noted by The Hill.

“State interest rate limits are the easiest way to stop predatory lending, and OCC rules would have bypassed them completely,” said Lauren Saunders, associate director at the National Consumer Law Center , a consumer advocacy group, by AP.

The repeal now goes to President Joseph Biden for signature.

Short-term cash flow concerns

The urgency of finding short-term liquidity (from borrowers) is underscored by the fact that, like PYMNTS and LendingClub recently estimated that 54 percent of American consumers have little or no money after spending their money on basic expenses.

At the same time, as shown here, banks have put in place services that are stopgap measures to retain consumers, so to speak, and presumably do so without resorting to additional (and perhaps high interest) sources of funding.

In one example, PNC Bank’s “low cash mode” alerts customers when their balances drop below $ 50 and again when they go negative. At the end of last year, in another example, FinTech Sezzle has partnered with Ally Lending, a digital financial services company. The partnership will allow Sezzle to offer more long-term loans.

And in an interview with PYMNTS, CEO of OpFi Jared kaplan said advanced technologies can help banks extend credit to consumers who have not had access to it in the past.

The movements are taking place in a context where at least some states are tightening up the way payday lenders operate. In an example, as reported by CNBCHawaii caps interest rates on small dollar loans in the state at 36%. New rules, the site said, “will also force the licensed payday industry to offer installment loans in place of traditional payday loans with a single payment due two weeks after borrowing an amount.”

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