Payday Lending Industry

Payday lending: How does it work?

Payday lenders enable quick access to finance for urgent short-term needs of millions of customers living pay check to pay check across the United States. Payday Advance Loans, also known as Payday Loans or Cash Advance Loans; provide money on demand. A person with a job, a checking account and proper identification can borrow anywhere from $100 to $1,000 until his or her next payday. Such borrowers write post-dated checks or provide written authorizations to the payday lender for the amount of the loan plus a fee. On the next payday the loan is either repaid in person by the borrower or the lender cashes the check or initiates an electronic funds transfer.

Regulatory environment

State Regulations
Currently, payday lending is primarily regulated at the state level through statutes designed to enable, control, or prohibit payday lending. Legislative efforts typically mandate interest caps, limit the number of loans a borrower can take on an annual basis, and implement more consumer-friendly repayment terms. Most states have taken some regulatory action in light of the recent controversy stemming from payday lending practices, but these regulatory schemes range from permissive to prohibitive.

A majority of states take a permissive regulatory approach to payday lending, implementing either minimal guidelines or no regulations at all. Twenty-eight states follow this permissive regulatory approach, under which payday lenders can easily charge triple digit interest rates and dictate stringent repayment terms.

Federal Regulations
Federal policy on payday lending is developing swiftly, with action both at the congressional and executive levels. Beginning in 2007, Congress enacted a law regulating payday lending practices involving members of the armed services and their families. More recently, the SAFE Lending Act was introduced in the 112th Congress. The Act requires online lenders to abide by the regulations of the state in which the borrower resides. Correspondingly, there was also a similar House Bill introduced in the same session.

The Dodd-Frank Wall Street Reform Act and the Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau. The Bureau was created for the purpose, among other things, of protecting consumers from abusive financial service practices. Accordingly, the Bureau has the authority to regulate payday loans. While the Bureau recently commenced its first field hearing to gather information on the short-term, small-dollar credit market, it has not yet taken measurable regulatory or legal action against payday lenders. However, consumer advocates and federal officials anticipate that the Bureau will play a significant role in the future. Despite the absence of action from the Bureau, the Federal Trade Commission (FTC) has recently taken an active role in policing the payday lending industry.

FTC’s Bureau of Consumer Protection, while lacking jurisdiction over banks, can exercise authority over the payday lending industry. With regard to payday lenders, the FTC enforces the Federal Trade Commission Act, the Truth in Lending Act, and the Electronic Fund Transfer Act. In 2011, the FTC brought action against numerous payday lenders, including tribal entities, for various deceptive practices in federal district courts. In addition, there are other Federal institutions like Federal Deposit Insurance Corporation that have issued Guidelines which Payday Lenders need to adhere to.

Recent developments in the industry
The payday lending industry has enjoyed considerable success without much regulatory pressure in the last decade. However, increasingly states and local governments are moving to restrict or eliminate payday loans. Despite these developments, there still exists significant demand for genuine and compliant payday lenders.

How can Payment21® support payday lenders in running their business with ease?
Payment21® can help compliant payday lenders in integrating their systems with Check 21 DD.
Check 21 DD stands for our solution to process Demand Draft. The Payment21®-system is unique in terms of remotely created payment orders (RCPOs), also known as Demand Draft. Demand Draft is a legitimate and commonly used method to collect payments. RCPOs and RCCs (remotely created checks) are governed by the U.S. Check Clearing for the 21st Century Act unlike ACH transactions that are controlled by NACHA-rules.

Quite simply, the Check 21 legislation allows for substitute checks, aka, Image Replacement Documents (IRDs). The law permits the recipient of a paper check to create a digital version of the original check, a process known as check truncation, into an electronic format thereby eliminating the need for further handling of the physical document.

A Demand Draft is a physical check draft, subsequently digital check image, that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn. Consequently, a Demand Draft is an item created by the merchant based on the consumers consent. This payment instrument is used in a variety of ways to process payments quickly and efficiently. For example, for people needing to pay a utility bill or credit card bill on the due date, merchants allow their customers to make a same day payment remotely over the Phone or enable consumers to forward the details of the debit entry over the Web, helping them to avoid late-payment penalties, including fees.

Consumers provide the biller with their checking account information and routing number and authorize the biller to create a paper check, subsequently digital check image, debiting the consumer’s account. The Uniform Commercial Code (UCC) permits the process of check drafting. Authorization is indicated on a check draft in the signature blank, usually by a statement such as the following: “This draft is preauthorized by the depositor, no signature required.” The check can be deposited at the bank, be imaged and processed via Check 21, or be imaged and converted to an ACH transaction at the discretion of the merchant.

Payement21’s Web-based imaging service allows merchants to process Demand Draft in the Cloud. Our proprietary system captures eCheck transactions through an API or via batch-upload. The first step of the procedure supports printing of paper checks. Subsequently, the system scans the items in the Cloud and turns these direct debit payments into so-called X9.37-files referred to as Image Cash Letter (ICL). Our Check 21-technology then goes ahead and securely transmits the ICL to the designated account, and as a result the transactions get deposited to the bank account of the merchant. Funds clear instantly and are available same day.

To benefit from Check 21 DD, merchants require a bank account with a financial institution providing Check 21 services with digital lockbox processing. Get started by contacting your bank with regards to accepting Image Cash Letter (ICL), and forward their ICL-specs, so we can begin working on your integration process.

Source: American Indian Law Journal

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