U.S. Government Walking Banks Through Payday Lenders’ Doors

  • In 2016, consumers spent $39.5B on repaying single payment credit
  • The Trump Administration is looking for U.S. banks to provide short term loans

The Office of the Comptroller of the Currency (OCC), which regulates all national banks and credit unions in the U.S., is pushing for U.S. banks to be able to enter the small-dollar short term loan market. How helpful could U.S. banks be to individuals needing access to emergency cash?

Why This Matters: When you look at the black community, they make up 18.2% of the unbanked and 31.1% of the underbanked group in the U.S., according to the Federal Deposit Insurance Corporation. Payday lenders are the financial institutions of choice for many of the individuals who fall in these categories. In 2016, U.S. consumers spent $6 billion repaying payday lenders whose APRs can be north of 400%.

U.S. banks used to offer deposit advance products that served individuals who were strapped for cash. In 2013, the OCC created regulations that pushed banks to end these products. Since then, the agency has been trying to figure out how to give banks flexibility to serve these groups while not harming them. “If we can get people back into the regulated market, that will be better for them and the economy,” said Comptroller Otting.

In some fashion, U.S. banks are already heavily involved in providing short term loans. In 2016, underbanked consumers spent $24.5 billion in bank overdraft fees, which makes up the lion share of the $39.5 billion single payment credit market. Lisa Servon, a professor at The New School, found consumers preferred payday lenders because using bank fees turned out to be unclear and more expensive. “The banking industry needs to develop different fee and service structures designed to accommodate lower income depositors,” said Servon.

What’s Next: Comptroller Otting has listed small dollar lending as a top policy priority for the OCC. U.S. banks will be looking to the OCC to provide written guidance before making any real changes to the products they offer consumers.

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