There have been increases in companies that are offering payday loans and short term loans in the United States, as well as critics of this financial tool. A lot of these critics are saying that these types of personal loans are just over-priced and bad for people. This is not actually the case, as these are just misconceptions.
The definition of a direct lender is a lender with no third party. This means the brokers stand aside and let the actual lender make the loan.
When you look at it, it is actually the banking financial institutions (BFI), which are the greatest critics of companies offering payday installment loans and cash advance.
Payday direct lender offers its customers short term unsecured loans with high fees and interest rates. Especially they specialize in bad credit personal loans.
This type of loan is also referred to as deposit advance loans or payday advances.
They are forms of credit that some customers may prefer for a number of reasons. This includes situations where they cannot qualify for other credit sources, for example not having a bank account to be able to apply for bank loans.
The borrower usually has to repay the loan back on the next payday. Which is why the loan is quite aptly called “payday loan”. This means that the application process and approval process usually includes a history of payroll and related employment records.
A growing number of payday lenders provide payday loans online. Consumers with good or bad credit score can even go through a loan application and obtain a cash loan and authorize the repayment of its amount and fees during the same online session.
A typical payday online loan scenario may go like this: the borrower obtains a loan. Then direct payday lenders provide the direct lender with authorization to send Automated Clearing House debits to the consumer’s account at a later date for repayment.
The payday lender’s bank originates the debits using the ACH network. Other payment options include wire transfer and remotely created checks.
Currently, both state and federal regulators are focusing on the payday lending industry in order to protect consumers from possible illegal payday online cash loan. Payday lending practices are most commonly regulated at the state level.
Some states completely prohibit payday lending, while others have higher requirements towards lenders, such as they have to be licensed and comply with maximum fees, loan amounts and interest rate requirements, among other restrictions.
The governmental-level regulations include the Dodd-Frank Act that has given the Consumer Financial Protection Bureau the authority to work against deceptive and abusive practices by a payday lender.
Payday lenders’ banks should bear in mind all the risks involved when working with online payday lenders. And such banks should make sure to incorporate due diligence techniques and to use all the available tools.
A payday lender’s bank should be aware that business relationship of this type that includes ACH origination activity and a company making illegal payday loans can damage the institution’s image. The bank’s image can suffer even if the institution is not complicit in the illegal activities of its customers.
But once the established financial institution determines that expediting the payments of online payday lenders falls within its risk management model, it should ensure that it follows all applicable laws and regulations.
One way to determine whether the AHC customers’ activities remain within the bank’s risk management model is to provide periodic reports on ACH customers to the bank’s board of directors. It is crucial for the bank to protect its own reputation, as that affects every part of its business.
It is also important to know your clients and their practices
A bank working with payday lenders should also develop and follow adequate due diligence procedures.
Both ACH rules and regulatory guidelines require that banks perform “know your customer” (KYC) due diligence.
These procedures include a variety of activities such as assessing the nature of the online payday lender’s activities, setting appropriate restrictions on the possible types of entries and exposure limits for the lender, and monitoring origination and return activity.
Due diligence steps usually consist of distinguishing the business principal owners, reviewing ratings for the business from various sources, such as Better Business Bureau, consumer complaint sites, and credit service companies. They also include determining whether there have been recent legal actions against the business.
Thorough review of the direct lender’s website, including the terms of the consumer’s authorization agreement and promotional materials, is advised.
These due diligence practices are on an ongoing basis for all merchants, not only online direct payday lenders. They help the bank with choosing and using appropriate restrictions for the customer and therefore mitigate the risk of the bank discovering a problem when it is too late.
Banks can develop all kinds of tools that can flag potential problems in-house or can obtain them from other sources like vendors, ACH operators or NACHA.
Consolidating a process to monitor transactions and returns can be used to identify anomalies, such as, for example, a sudden uptick in returns or an unusual increase in origination levels or average dollar amount. Detecting anomalies can be a sign to conduct further research on a customer, including personal information.
Other tools can be NACHA’s originator watch list and vendor-terminated originator databases. They can help banks to identify customers that may warrant additional scrutiny. Banks also conduct periodic audits in order to identify rules compliance issues.
For a bank protecting its reputation, it is of the utmost importance, when it is considering offering payment services to high-risk originators like online direct payday lenders.
The bank should proceed with caution when performing risk-based due diligence on new customers. After that, it should diligently monitor current customers, so it can identify problems early and address them on time.