Regulator Urges Banks to Compete With Payday Lenders

“It’s not like that credit demand went away, it just got displaced into the most expensive segment,” he said. “I personally believe that banks can provide that in a safer, sound, more economically efficient manner.”

A handful of large and midsize banks, including Wells Fargo and Regions Bank, once offered so-called deposit advance loans that let customers quickly borrow small sums, which would typically be repaid from their next paycheck. The banks stopped making such loans in 2014, after federal regulators warned banks against providing products that “can trap customers in a cycle of high-cost debt that they are unable to repay.”

Mr. Otting’s office rescinded that guidance last year. The memo sent on Wednesday formally gave banks the green light to return to the short-term lending market.

The Pew Charitable Trusts, which has fiercely opposed payday lending, praised the change of heart. “If banks begin offering these loans according to strong safety standards, it could boost financial inclusion and be a game-changer for the millions of Americans who use high-cost loans today,” said Nick Bourke, the director of Pew’s consumer finance research.

But some major obstacles remain. The biggest is a new rule from the Consumer Financial Protection Bureau, scheduled to take effect in August 2019, that places strict limits on loans with a term of 45 days or less. Those rules would cover the kind of deposit advance loans banks used to offer. Mick Mulvaney, the acting director of the bureau, has said he wants to reconsider the rule, but he has not yet began the formal process needed to alter or eliminate it.