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Federal Government Cracks Down on Bank “Payday Loans”

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While legislation restricting traditional storefront payday lenders seems to have stalled in the courts for the time being, the FDIC and the Office of the Comptroller of the Currency are expected to pass additional rules governing “payday loans” offered by traditional banks in the upcoming days.

Banks don’t traditionally call their short term high-interest loans payday loans, choosing catchier marketing instead. The way they work is very similar to the traditional payday lender offerings, though. Almost identical.

Consumers can “borrow” against their checking accounts and repay the loans along with a considerable origination fee, usually in sums of up to $500. The bank simply withdraws the cash from the person’s checking account, plus the fee at the appointed deadline. For example, this type of a loan at Wells Fargo will cost you $1.50 for each $20 you borrow. If you borrow $500, that’s a fee of $37.50 right off the bat.

What happens if you don’t have the cash in your checking account when the bank decides to take it out? You get hit with the loan, the origination fee, and an overdraft fee for bouncing a check. It’s easy to see how this can turn into a vicious cycle pretty quickly.

If the new regulations go into effect, as expected, the following will be true:

1. Banks will have to assess a borrower’s ability to repay, instead of allowing everyone to take these loans.
2. A 30-day waiting period will be put into effect, so consumers can’t take out one loan after another.
3. Consumers won’t be able to get another loan of this type if they still have one that isn’t paid off.
4. Banks will have to convert their fees to a comparable interest rate and disclose that number to consumers.

Banks, like payday lenders, argue that they are simply providing a service to customers who need it in “emergency” situations. There is something to be said for that, but these customers are often those that can least afford it.

The post Federal Government Cracks Down on Bank “Payday Loans” appeared first on News.


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