Can Payday Loans Really Be Regulated?
by. Henry Meier
Payday loans are a cross between the weather and art. They’re like the weather because everyone talks about them; they’re like art because they’re ultimately impossible to define yet everyone knows it when they see it.
This was the week regulators highlighted the importance of dealing not only with payday loans, but direct deposit account loans. First, the CFPB came out with its white paper analyzing the market for these products and pointing out that its analysis applied to both banks and credit unions. Then the OCC, spurred on no doubt by the CFPB and a Wall Street Journal article reporting that a guidance was imminent, released a proposed guidance on the proper management of direct advance products. Of course, the OCC has no jurisdiction over credit unions, but given the CFPB’s interest in the issue, it’s hard to see how increasing examiner emphasis on short-term loan products won’t impact at least state chartered credit unions in states that allow payday loans. (Given New York State’s criminal usury rate of 25% and the interest rate cap imposed on federal credit unions, credit unions in New York State couldn’t offer payday loans even if they wanted to).
First some background. The OCC defines a deposit advance product as a short-term credit product offered to a consumer maintaining a deposit account, reloadable prepaid card or other similar bank related product. Banks that offer the product allow customers to take out a loan in advance of the customer’s next scheduled direct deposit. As a result, they are similar, but not identical to traditional payday loans that aren’t tied to a specific account. Nevertheless, both the OCC and the CFPB in its white paper understandably see the products as posing the same risk to consumers.
Another commonality highlighted by both the CFPB’s white paper and the OCC’s proposed guidance is that both recognize the need for short-term loan products. As explained by the CFPB, “these types of credit products can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow at a high cost.” The Bureau goes on to explain that what it is most concerned about is the long-term use of these lending products resulting in rolled over loans and higher fees.
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