Payday lending can expand in states where they have been previously restricted. The dangers of payday loans: What you need to know.
An initiative on the ballot was passed by more than half Nebraskan voters to limit the interest rates for payday loans, which are short-term but high-interest. Previous law allowed annual rates as high as 459 percent.
However, just one week before the election, an obscure U.S. Treasury Department branch, the Office of the Comptroller of the Currency, issued a ruling. This ruling, many consumer advocates claim, could undermine the intentions of the Nebraska voters–as also anti-payday regulations and laws in other states.
Nebraska’s initiative made it the 19th and Washington, D.C. 19th states to ban ultra high-interest short-term loans, or to limit interest rates at a level that effectively bans these loans, as lenders no longer consider the business to be financially viable. You can also check Oak Payday Online Loans offer.
These restrictions combined reflect a growing consensus about the need for stricter regulation of payday lending. Because many payday borrowers don’t have the funds to repay the loan, they can become “debt traps“.
It comes as no surprise that Nebraska has been included in the list. This is due to Donald Trump’s win.
“There is overwhelming bipartisan acceptance that this type of lending is extremely dangerous because it traps individual in a cycle of debt,” Lisa Stifler, the Center for Responsible Lending’s director of state, says. This research-and-policy nonprofit aims to end predatory lending.
Stifler, who is an advocate for payday lenders claims that the OCC rule allows them to operate in states with no laws. The OCC rule now allows payday lenders to partner up with other banks in order to avoid local interest-rate caps. “
It is uncertain whether the OCC’s ruling will survive ongoing legal challenge or possible attempts by the incoming Biden government to overturn.
Many consumer advocates feel that this development has come at an unfortunate time. “
Why is payday lending a problem
An estimated 12 million Americans apply every year for a loan from a payday lender. They usually borrow less than $500 each and promise to pay it off in two weeks. Typically, the borrower provides electronic access to the bank to confirm the promise or signs a forwarddated draw.
Payday loans are an affordable way to borrow money. Payday lenders charge a range of fees from 10-30% for a loan.
The fact that many borrowers can’t or won’t repay their loans within two days is a further complicating factor. They then take out another loan in order to cover the first. This can lead to another round of fees.
Federal Deposit Insurance Company performed a survey back in 2015, and found that Hispanics are three times more likely than Black Americans to get payday loans.
The Consumer Financial Protection Bureau, (CFPB), attempted to stop repeat borrowing in 2017. They issued a regulation stating that payday loans were “unfair and abusive” without “reasonably considering consumers’ ability to repay.” “
The regulation never became effective and was rescinded by the states in July 2020. Consumer advocates are now worried that OCC’s ruling last month has left them with no option but to protect themselves from the payday debt trap.
Rent-a Bank Programs
Since the beginning, potential lenders have tried to skirt state regulations by using “rent a bank” schemes. An out of state bank is a company that holds a high interest loan that it cannot legally make. It is permitted to lease its services in exchange for a small amount of the proceeds.
While these schemes were widespread around 20 years ago they were banned in most cases in the 2000s.
The true lender doctrine is a legal principle which allows courts to determine which entity is the true borrower. It takes into account factors such as who started the business and who is taking on the most financial risk.
October’s OCC ruling effectively shattered the doctrine by declaring that the true lenders are simply the entities named on the loan agreement.
According consumer advocates, OCC’s rules allow payday lenders freedom to avoid state usury law by simply entering the name a willing out-ofstate lender into the loan documents.
OCC denies these concerns. They state that rent-a–bank schemes “have not in the federal bank systems” and denies the ruling facilitates their usage. OCC insists however that the rule doesn’t eliminate legal uncertainty about who is eligible to borrow money and what laws are applicable.
Bryan Hubbard from OCC’s Assistant Comtroller for Public Affairs says that by clearly identifying who is the lender, banks can be held accountable for all compliance requirements related to origination loans.
Saunders disagrees with this statement and calls the OCC’s assurances “completely empty”. The fact that banks have to comply with both federal and state laws does not prohibit them from participating in rent-a bank programs. The law also allows banks the right to charge whatever rate they wish, regardless of where they borrow.
Carrejo, C.R., agrees with OCC’s assertion. However, the rule does NOT prohibit rent-as banks schemes. “
Strategies to Avoid the Payday Debt Trap
It is still unclear if payday lenders will take advantage of this loophole to large extent.
You should have an emergency fund. To avoid high-interest loans, it is best to be financially independent money set aside. You can plan ahead to cover an emergency or unexpected budget deficit. Start small, and you’ll save $10 here or $50 there. First, start saving enough money each month for your bills. Next, ensure you have enough money in your bank account for at least three months. Next, you’ll need six.
Talk to your landlord. A landlord might offer you a lower or longer term payment, or a creditor may offer you a plan for repayment that you are able to afford.
You can sell your stuff. Yard sales Craigslist and eBay are good ways to raise quick cash without incurring debt. Payday loans can be avoided by contacting a pawnshop.
You can apply for interest-free loans. Some family members and friends might be able. Some employers offer promotions. Local non-profits and community organizations often offer emergency loans, which are usually interest-free. You might be eligible for a loan against your retirement savings. If the loan is not returned by the due date, you could face penalties or fees. But it could still be a great option to earn triple-digit interest and save money on your retirement.
Payday stores charge more than lenders.
High interest rates are a hallmark of credit cards. However, APRs range from the mid-20s up to the mid-30s. However, this is much lower than what you would get from payday lenders. These loans are typically much less expensive than payday loans, however they are more expensive than credit card.