Out of the periphery and it’s still an ugly business

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Credit cards often grab the headlines, but rates are highly regulated, the market is transparent, and competition is stiff. Standard regulations like Reg E and Reg Z ensure a fair credit environment, and regulators like the OCC are there to ensure safe and solid loans. However, for those who have used up their plastics or cannot qualify under bank underwriting standards, payday loans may be the only option.

I tried a couple of providers a few years ago so I could experience the process, and perhaps feel the pain of sky-high interest rates. Call it crazy, but the field trial is a good way to understand the business process. And perhaps be the first consumer to read the required disclosures cover to cover. i did the same with BNPLand some non-national credit card companies just out of curiosity or just professional interest.

The terms of the PayDay loan were remarkable. At this lender, borrowing $300 for 14 days incurs a finance charge of $33. Certainly $33 won’t kill the family budget, but the annualized interest rate is enough to surprise a frugal consumer.

If you were in a household with a sick child, broken transmission, or pending bank overdraft, the PayDay loan could be a lifesaver if there was no other option. In the experiment, I found that the location resembled a progressive bank branch and the people were friendly. The transaction settled within moments based on my 30 year old checking account and a current pay stub.

Recent state legislation helped with some of the predatory lending rates, but the investigation of Pew Charitable Trusts indicates a new trend. In a recently published study, they found that some Banks now charge more interest than payday loans. The article highlights the excellent work that addresses the invisible credit market by Bank of America, US BankY huntington bankand brings to light an interesting trend used by payday lenders who align themselves with Utah’s wacky industrial banking laws.

According to the Utah Department of Financial Institutions“Industrial banks were also known as Industrial Loan Corporations (ILCs) in Utah until 2004, when state law was amended to change the name of this class of institution to better reflect their legal status as ILC-insured depository institutions.” FDIC.”

An emerging trend is the use of bank rental licenses by local PayDay lenders. What is interesting is how a bank’s leasing model allows a state-licensed lender to bypass state interest caps. This is allowed due to a long-standing decision that allows banks to export rates based on the maximum interest rate allowed in the state. This logic is what put Citi’s card business on the map with its move to South Dakota.

However, in the context of PayDay loans and interstate rate migration, this is an example of interest rates on steroids. Pew cites examples of licensed PayDay lenders changing their rates from 88% to 149% in the state of Ohio, and in Oregon from 154% to 262% APR. No impact was seen in some states, but other examples include the states of Hawaii, Oregon, and Washington, where rates moved to 184%, 262%, and 260%, respectively.

For now, know that credit card rates don’t even come close to this lending niche, and payday pricing is high due to the inherent credit risk. But either way, usurious interest rates like these can only solve a temporary domestic problem. In the long term, payday loans cost much more than traditional bank loans.

A full copy of the report can be found. here.

summary by brian rileyDirector, Credit Advisory Service at Mercator Advisory Group

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