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Can Banks Disrupt the Payday Lending Business?

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loanapproved72-47ce85caSince its inception in the 1990s, the payday lending industry has grown at an astonishing pace. Currently, there are about 22,000 payday lending locations — more than two for every Starbucks — that originate an estimated $27 billion in annual loan volume.

But payday lenders may soon face some stiff competition. A few of the largest consumer banks in America are considering going to market with new small-dollar installment loan products, reports the American Banker.

The Consumer Financial Protection Bureau (CFPB), the U.S. government’s consumer protection agency, is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. One of the proposals is to exempt lenders from certain requirements if the amount the consumer is required to pay each month is no more than 5 percent of the consumer’s gross monthly income. According to American Banker:

[T]he banks said if the 5% exemption is part of the proposal, they believe they can offer a product that would satisfy regulators. A mockup of what the product could look like would be a $500 five-month loan for a borrower with an annual income of $30,000 and monthly payments of $125 (or 5% of the borrower’s $2,500 average monthly income). After assuming a 6% loss rate (which would be comparable to similar installment loans currently on the market), automation expenses and servicing fees, a bank could net roughly $70 while the borrower would be on the hook for $125. The average cost of a similar payday loan product would be closer to $750.

“The 5% payment option is the only part of the CFPB proposal that could save millions of borrowers billions of dollars,” said Nick Bourke, director of the small-dollar loans project at the Pew Charitable Trusts. “It would enhance underwriting while minimizing compliance costs by capping the monthly payment at 5% of the borrower’s income with a term up to six months.”

The banks wouldn’t make much money off of these types of loans, but as the article notes, they would increase goodwill with local communities and potentially entice under-banked consumers to use other banking services and products.

The CFPB is set to announce the beginning of the payday lending rulemaking process next Thursday, June 2nd at a field hearing in Kansas City.

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Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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