The OCC’s “real lender” rule is a bad route to small dollar lending by banks
Research shows that payday loans and similar loans hurt the financial health of millions of Americans every year. The Pew Charitable Trusts have found that the average payday loan borrower has $ 375 in outstanding loans five months a year – and pays $ 520 in fees just for that credit. The Consumer Financial Protection Bureau has jurisdiction over these loans. By all means, the bureau should immediately reinstate its 2017 payday loan rule, which, before being repealed in 2020, provided consumers with the necessary collateral for single payment loans without restricting installment loans or margins. credit.
But banking regulators such as the Office of the Comptroller of the Currency are making decisions that are just as important as anything the CFPB could do to determine the financial fate of millions of households with no margin for error.
Banks are an obvious source of low dollar credit. Each of the 12 million Americans who use payday loans each year has a checking account, which is one of two conditions – along with income – for taking out a payday loan. But if banks were to choose to have a more direct impact by providing loans to their customers on current account, the benefits would be many. A bank has an existing relationship with the customer; has no customer acquisition fees; can spread its overheads over a full range of products; can borrow money at a much lower rate than payday lenders; can use the customer’s cash flow to automate an assessment of the customer’s repayment capacity; and can only deduct payments when there is sufficient balance.
Banks faced too much regulatory uncertainty to make large-scale small loans until May 2020, when they received clear joint guidance from the OCC, Federal Reserve, Federal Deposit Insurance Corp. and the National Credit Union Administration. This direction was consistent with the CFPB’s 2017 payday loan rule, which encouraged loans to be repayable in installments with terms longer than 45 days. This meant that banks could now offer installment loans and lines of credit to their customers who previously used payday loans and other high-cost loans. Two of the country’s five largest banks – US Bank and Bank of America – now offer loans in line with these guidelines.
Problem solved? Not exactly, because just as banks can offer consumer loans at a much lower cost than payday lenders, they can also help payday lenders bypass state laws that protect consumers. In fact, a small number of banks now provide loans to payday lenders that would otherwise be illegal under the laws of the payday lender’s state. The banks, which by their statutes are exempt from such laws, make the loans and sell them to payday lenders who in turn market, manage and absorb the losses resulting from the loans. The arrangement allows companies to charge more than state laws allow.
Although these arrangements are not widespread, they have increased in recent years. And a new OCC regulation could compound this problem by declaring that the bank should always be considered the “real lender” if it initiates or finances a loan, even if that loan is quickly sold to a high-cost lender. This regulation does nothing to help a bank serve its own customers or recruit technology providers; instead, it strengthens the hand of high-cost lenders who use banking partners as a justification for ignoring state laws.
Regulators may have hoped that banking partnerships with payday lenders would lower prices for consumers, but experience shows that the result has instead been to lend on terms so expensive that they are often illegal under state laws. For example, following a 2018 bipartisan reform in Ohio, a few banks partnered with unlicensed payday lenders in Ohio to issue loans at prices almost double those charged. by state-approved payday lenders. These loans are allegedly exempt from state laws because they are issued by the banks – the “real lender” – before being transferred to high cost lenders, and they have been the subject of legal disputes. The OCC rule would have the effect of encouraging such nominal partnerships, the main purpose of which is to avoid state laws.
A better, safer, and much cheaper solution would be for banks to provide affordable installment loans and lines of credit to their existing customers. They can hire fintech companies to help them automate the underwriting and lending process without selling the loans to payday lenders.
There is a wrong and a right way for banks to get involved in small loans. The OCC is correct in its May 2020 joint guidance with the FDIC, Fed, and NCUA, creating a solid foundation for promoting small installment loans and lines of credit that banks extend to their checking account customers. These loans and lines of credit could save millions of borrowers billions of dollars every year. The OCC’s “real lender” rule, on the contrary, puts borrowers in a position of failure. This has the effect of raising prices rather than lowering them, thus undermining hard-won protections by the state for consumers.