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Susan Tompor: Payday loans rule could lead to cheaper alternatives

Susan Tompor, Detroit Free Press on

Published in Home and Consumer News

Consumers who are caught in a financial squeeze might one day be able to skip the payday loan store and turn to banks and credit unions for lower-cost, quick-fix loans.

That's one possibility being raised by consumer advocates who want to see an end to gruesome, triple-digit rates that are charged to vulnerable consumers who take out payday loans.

The Consumer Financial Protection Bureau's final payday loan rule -- which was announced Oct. 5 and could go into place in 2019 -- could open the door to lower-cost installment loans from banks and credit unions, according to Nick Bourke, director of the Pew Charitable Trust's consumer finance project.

Before that happens, Bourke said banks would need to receive clear guidelines from regulators. But the loans could be six to eight times less costly than payday loans.

We're in a wait-and-see mode. Congress could move to overturn the rule -- but some say that's unlikely.

What could change: Lenders eventually would be required to research upfront whether borrowers could afford to repay all or most of their short-term loans at once -- including payday loans and auto title loans -- and longer-term loans with "balloon" payments.

Under the rule, a lender would have to verify income and major financial obligations and estimate basic living expenses for a one-month period -- the month when the highest payment is due.

Banks and credit unions have some advantages because they already have customer relationships and can automate loan origination. Pew has advocated for streamlined underwriting guidelines on bank-issued installment loans that allow monthly installment payments of up to 5 percent of monthly income.

What won't change: People who are cash-strapped still will be looking for ways to cover their bills.

"They're in desperate need of help," said Herman Starks, bishop of Christ TRUTH International Ministries of Deliverance in Detroit.

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