How banks got into the payday lending business

Get to know the new payday loan. It looks a lot like the old payday loan.

Under the Obama administration, the Consumer Financial Protection Bureau attempted to curb abusive payday loans, including forcing lenders to ensure that borrowers had the funds to repay their loans. The Trump administration is under Interim CFPB Director Mick Mulvaney I want to reverse these rules and give payday lenders that as an industry donated significant amounts Money for Mulvaney when he was a congressman, more wiggle room. A high profile rule of the CFPB for regulating payday loans will be checked, and Mulvaney’s CFPB dropped cases too the office had previously prosecuted against payday lenders.

Payday lenders have noticed this and are already adjusting their business to get out of regulation. Meanwhile, high-yield small dollar loans have migrated to other parts of the financial industry, including traditional banks. Banks don’t call their loans “payday loans” – rather Names like “Simple Loan” – but the problems, including the high cost and the potential to create a debilitating debt cycle, are largely the same.

Payday loans are short term loans that are so named because they are intended to be paid back when the borrower earns his next paycheck. The interest rates on these loans are high and can be as high as 400 percent or more. (By comparison, a borrower today pays around 5 percent interest on a prime mortgage and between 15 and 20 percent on a credit card.) Payday lenders are piling up in areas where people are disproportionately low in income or colored peoplewho take advantage of economic uncertainty and for those for whom traditional credit and banking services are unavailable or inadequate.

It is not just the high interest rates that make the loans lucrative for lenders and detrimental to borrowers. Much of the income payday lenders make comes from repeat business by a small group of borrowers who take out loan after loan after loan and engage in what are known as “migrate. “According to the CFPB, there are more than 75 percent of the loan fees come from borrowers who take out 10 or more loans per year. These borrowers collect high fees that outweigh the economic benefits of the loans and are stuck in a debt cycle.

This is serious money we’re talking about: Before the Obama administration tried to regulate the industry more, payday lenders did earned around $ 9.2 billion yearly. This sum is about $ 5 billion today, even before the rules of the Obama team have come into full force. Meanwhile, many states have also taken positive steps to regulate payday loans in recent years. (The credits are also direct banned in some states.)

However, that doesn’t mean that payday loans will go out of style.

For starters, old payday lenders have revamped their products, offering loans that are paid off in installments – as opposed to old payday loans that are repaid all at once – but still come with high interest rates. Income from this type of loan up more than $ 2 billion between 2012 and 2016. The rules of the CFPB do not apply to rate-based loans.

“They claim these loans are different, safer, and more affordable, but in reality they have the same characteristics of predatory loans,” said Diane Standaert, director of government at the Center for Responsible Lending. These Marker included their high cost, the ability of lenders to access borrowers’ bank accounts, and that they are structured to keep borrowers in a debt cycle. “We’re seeing all of these similar traits that have plagued payday loans,” Standaert said.

Large banks are now starting to experiment with short-term, small-dollar loans. The US Bank is the first to launch a payday loan-like product for its customers, lending them up to $ 1,000 in the short term at rising interest rates up to 70 percent and higher. (Think fees of $ 12-15 for every $ 100 borrowed.)

Previously, the major American financial institutions were very reluctant to invest high-interest loans in small dollars. When several large American banks, including Wells Fargo and Fifth Third, launched short-term credit products before 2013, they were stopped by the Office of the Comptroller of the Currency, which regulates the national banks. “[These] Products share a number of characteristics with traditional payday loans, including high fees, short repayment periods, and poor repayment capacity. As such, these products can keep customers trapped in a cycle of heavy debt that they cannot repay. “ said the OCC at the time.

However, in October 2017, the OCC – now under the auspices of the Trump administration – overturned that ruling. It then became active in May 2018 encouraged national banks enter the short-term lending business, as it makes more sense for banks to compete with other small dollar lenders. “I personally believe that banks can do this more securely, more solidly and economically.” said the head of the OCC.

However, in a letter to many Washington financial regulators, a coalition of consumer and civil rights groups warned of this change: argue that “Bank payday loans are expensive debt traps, just like non-bank payday loans.” While the terms of these loans are certainly better than those offered by a traditional payday lender, that doesn’t make them safe and fair alternatives.

According to a recent poll more than half of millennials have considered using a payday loan while 13 percent have actually used one. That number makes sense in a world where Traditional bank fees and more and more workers are being pushed into the so-called “gig economy” or other alternative work models that are not paid every two weeks. A quick infusion of cash to pay a bill or deal with an unexpected expense can be attractive, even with all of the drawbacks that payday loans come with.

Payday lenders seem to be well aware of the regulatory shift they are in; They have earned more than $ 2 million in political donations ahead of the 2018 midterm elections, most of what they did in a year without a presidency, according to the Center for Responsive Politics.

This is real money, but it’s nowhere near as much as borrowers can lose if payday loans continue to be made the same old way. In fact, a 2016 study found that consumers in states with no payday loans Save $ 2.2 billion in fees yearly. That’s 2.2 billion reasons to make sure lenders small and large can’t get back to business as usual.

About Alexander Estrada

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