OCC 'True Lender' Rule Is Wrong Path to Small-Dollar Lending by Banks

OCC 'True Lender' Rule Is Wrong Path to Small-Dollar Lending by Banks

Banks could be a better option than payday lenders to meet consumers’ short-term credit needs. But all the OCC’s regulation does is enable partnerships that circumvent state usury laws.

Research shows that payday and similar loans damage millions of Americans’ financial health every year. The Pew Charitable Trusts found that the average payday loan borrower has $375 in outstanding borrowings five months of the year — and pays $520 in fees alone for that credit. The Consumer Financial Protection Bureau (CFPB) has jurisdiction over these loans. By all means, the bureau should immediately reinstate its 2017 payday lending rule, which before being rescinded in 2020 provided necessary consumer safeguards for single-payment loans without restricting installment loans or lines of credit.

But bank regulators such as the Office of the Comptroller of the Currency (OCC) make decisions that are just as important as anything the CFPB could do in determining the financial fate of millions of households that have no margin for error.

Banks are an obvious source of small-dollar credit. Every one of the 12 million Americans who use payday loans each year has a checking account, which is one of two requirements — along with earning income — for taking out a payday loan. But if banks chose to have a more direct impact by making loans to their checking-account customers, the advantages would be numerous. A bank has an existing relationship with the customer; has no customer acquisition costs; can spread its overhead costs across a full suite of products; can borrow money at a much lower rate than payday lenders do; can use the customer’s cash flow to automate an assessment of the customer’s ability to repay; and can deduct payments only when there is a sufficient balance.

To read this opinion in full, visit American Banker (account required).

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In July, the federal Consumer Financial Protection Bureau (CFPB) rescinded its well-balanced 2017 safeguards for payday and similar loans with terms of up to 45 days. That change will be a setback for the millions of borrowers who won’t have these protections, but banks can help mitigate the harm.

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On Sept. 3, The Pew Charitable Trusts submitted a letter in response to a request from the Office of the Comptroller of the Currency (OCC) for comment regarding its efforts to determine the circumstances under which a national bank or federal savings association should be considered the “true lender” in the context of a lending partnership between a bank and a third party.

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