Government backs new push for banks to issue short-term loans |

Government backs new push for banks to issue short-term loans

Phyllis Romero 24 May 2018 NEWS

Government pushing short-term loans by banks

Should banks open their doors to sub-prime consumers, it could be a game-changer affecting millions.

The government has taken a stance that could change the lives of millions of American borrowers who rely on payday loans to make ends meet. The Office of the Comptroller of the Currency (OCC) issued a statement on Wednesday rallying banks to offer more choices for sub-prime borrowers who use short-term loans.

The push was likely another government step to broaden the choices for borrowers of short-term loans.

The administration has made other controversial moves in recent history in an effort to steer borrowers away from payday loans, which it views as trapping consumers in cycles of debt.

On Tuesday, the House voted to pass legislation that would alter the Dodd-Frank Reform and Consumer Protection Act, which would roll back regulatory measures and enable small banks to lend more money through short-term loans.

In October 2017, the watchdog agency Consumer Financial Protection Bureau issued a rule targeting what it deemed unfair practices in the payday loan industry, among others.

In the OCC statement, Comptroller of the Currency Joseph Otting pointed out that American consumers borrow nearly $90 billion each year in the form of short-term, small-dollar loans. Millions of these short-term loans are issued through payday lending facilities in amounts ranging from $300 to $5,000.

Payday loans are often criticized for their exorbitant interest rates and easy access, which often set up its consumers in a cycle of continuing debt.

Otting stated that consumers should have access to more responsible and affordable loans. He urged banks to be part of the solution by offering safer installment loans to consumers with lower FICO scores. The OCC urges banks to make more traditional payback terms available, such as equivalent amortizing payments over a 2- to 12-month timeframe, when underwriting procedures illustrate the consumer can repay the personal loans.

“Bank-offered products can help lead consumers to more mainstream financial services without trapping them in cycles of debt. When banks offer products with reasonable pricing and repayment terms, consumers also benefit from other services that banks regularly provide, such as financial education and credit reporting.”

The OCC says more bank participation in short-term loans would increase consumer options towards more favorable borrowing terms, which could have a positive effect on the overall economy.

Should banks follow the OCC’s lead, it could have a major effect on three targets – the banking industry, sub-prime consumers and the payday loan industry.

Learn the difference between payday loan terms and more traditional credit terms for short-term loans by reading our guides to payday loans and personal loans.

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