US banks are given more freedom to offer unsecured loans

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Wells Fargo Updates

The Trump administration plans to relax the rules on short-term small dollar lending to pave the way for U.S. banks to prosecute the business of tens of millions of American families struggling to make ends meet.

Banks have historically shied away from providing unsecured loans to insolvent consumers, complaining that tough underwriting rules – and negative publicity on loans with very high APR – made the business more difficult than it was worth.

But on Wednesday, the currency’s auditor Joseph Otting said standards should be relaxed to allow banks to borrow small loans, typically between $ 500 and $ 5,000, over a 45-90 day period.

Big bank lobby groups are demanding more flexibility from regulators, arguing that vulnerable consumers have been forced into an underworld of payday lenders and pawn shops that generally offer much easier protection from abusive and predatory practices.

“If we can get people back into the regulated market, it’ll be better for them and the economy,” said Otting, who spoke at a conference hosted by the American Bankers Association.

The move signals a departure from the previous government, which in 2013 urged banks to scrap a form of short-term lending known as “deposit advances,” which is usually repaid in a lump sum through the borrower’s next paycheck. Big regional banks like US Bancorp, Regions finance and Fifth third had been particularly active.

Mr Otting, a former CEO of OneWest Bank and an ally of Steven Mnuchin, the Treasury Secretary, is the daily regulator for national banks like Wells Fargo, Bank of America and JPMorgan Chase. He also serves on the board of directors of the Federal Deposit Insurance Corporation (FDIC), another banking regulator, and is a voting member of the Financial Stability Oversight Council.

He revealed few details about his plans on Wednesday, but stressed that he wanted to encourage banks to offer installment loans instead of payday loans or deposit advances. With installment loans, borrowers make a series of fixed payments until the balance is paid back. The lender charges interest instead of a one-time fee.

The unsecured consumer credit market has grown rapidly in recent years as wages have stagnated while one-off costs such as medical bills have steadily increased. A opinion poll Last year the Federal Reserve found that nearly half of American families couldn’t meet $ 400 in emergency expenses without borrowing or selling.

Online lenders have flooded the area, some of them targeting consumers with low or no credit scores. Some large employers have also responded by offering ways to bridge the gaps between income and expenditure. Walmart, for example, has partnered with a fintech company called PayActiv to enable its 1.4 million U.S. employees to tap wages they deserve but have not yet paid.

Todd Baker, a former banker who now runs the consulting firm Broadmoor, said bank-offered small dollar loans would not solve the fundamental problem of low and irregular wages. But he said consumers in general would be better protected from abusive and fraudulent practices by staying away from check registers and liquor stores.

“Low-income people need liquidity,” he said. “That happens better inside a regulated bank than outside.”



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