To many, it may appear that Americans are as addicted to credit as they are to their favorite latte, and the lending and credit industry has reaped the benefits, especially from those who have less-than-a-great credit score. One aspect of this fact appears to be changing based upon a recent announcement by federal regulators.
The announcement basically states that authorities who regulate the banking industry will be closely scrutinizing short-term loans, commonly referred to as pay day loans. The news is being heralded by consumer advocate groups who have expressed their concern that these types of loans should be classified as predatory lending.
In November of 2013, the Office of the Comptroller of the Currency along with the Federal Deposit Insurance Corporation (FDIC) issued a statement directed at banks that offer these types of loans. This statement advised that these lending practices were going to be closely scrutinized to ensure that the borrowers ability to repay, usually measured by credit score, was taken into consideration when executing the loans. Large banks in the US, including Wells Fargo, US Bank and Regions, are responding to the news by halting their offerings of such loans, many as soon as within the next few weeks.
What Makes a Pay Day Loan Predatory?
In a nutshell, a predatory loan is defined as one that exploits the inability to repay by the borrower. Pay day loans are popular among the nations working class who literally live from paycheck to paycheck. Many of these people have a less-than-optimal credit score which makes it difficult for them to obtain short-term credit elsewhere, such as with a credit card.
These consumers often find themselves running short on cash in the few days before their next paycheck and may need such necessities as groceries or even gas for their cars in order to drive to work. By taking a short-term pay day loan, these individuals can obtain the cash they need. The terms of these loans usually require that the individuals pay checks must be on direct deposit with the lending institution, and when the workers wages are deposited, the bank immediately withdraws its repayment for the loan.