WASHINGTON—The Consumer Financial Protection Bureau, preparing to roll out rules​aimed at reining in high-interest payday loans, is jawboning banks and credit unions to provide better alternatives for borrowers in need of small, short-term loans.

Richard Cordray, director of the watchdog agency, said it is discussing ways to make it easier for banks and credit unions to offer "small-dollar" loans. The step could put the agency on a collision course with banking regulators, who have discouraged traditional banks from offering such loans. It could also fuel opposition from the $38.5 billion payday-lending industry, which fears the new rule would wipe out much of its business.

"I personally believe banks and credit unions can be low-cost providers of small-dollar loans," Mr. Cordray told The Wall Street Journal. "I think that working with banks and regulators involved, there would and should be an ability for them to offer decent products."

Mr. Cordray didn't offer specifics about the rule, but said banks could offer small-dollar loans as "rescue products" for their customers. Under a draft of the rule released last March, lenders would be required to verify the borrowers' ability to pay back the loans, limit the number of loans borrowers could take out and require the lenders to offer affordable repayment options.

The Treasury Department is also pushing an alternative to payday lending. Its budget for fiscal 2017, unveiled Tuesday, includes funds to help community development financial institutions extend small-dollar loans. The budget sets aside at least $10 million to provide technical assistance and to cover potential loan losses incurred by these lenders, which fund development projects in financially struggling communities.

In recent years, banks, including Wells Fargo & Co. and U.S. Bancorp stopped offering products similar to payday loans but with somewhat lower interest rates. Their exit followed 2013 guidelines issued by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency that warned of risks but didn't ban the loans outright.

Because the rule has yet to be formally proposed, spokesmen for the FDIC and OCC declined to comment as did a spokesman for Wells Fargo. U.S. Bancorp didn't respond to a request for comment.

The payday lending rule, expected to be formally proposed within the next few months, represents the federal government's first comprehensive attempt to curb payday lending, which can carry annual interest rates exceeding 400%. While millions of Americans lack access to bank accounts, payday customers—who pledge repayments through automatic withdrawals on their paychecks—do have regular bank accounts.

Mr. Cordray's comments are part of a CFPB effort to expand financial services to lower-income consumers. On Feb. 3, the agency asked banks to voluntarily offer low-cost, no-overdraft checking accounts available to consumers to help bring them into the banking system.

House Republicans, long critical of the CFPB, are scheduled to grill a top agency official Thursday at a Financial Services subcommittee hearing entitled, "Short-term, Small Dollar Lending: The CFPB's Assault on Access to Credit and Trampling of State and Tribal Sovereignty."

Banks and credit unions would be interested in offering such loans to their customers, said David Pommerehn, vice president and senior counsel at Consumer Bankers Association, a trade group of retail banks. In order for the rule to work, he cautioned, it must be easy to use so banks can issue loans quickly to meet consumers' needs for emergency cash.

Mr. Pommerehn also urged bank regulators to forge a common position. "First and foremost, the CFPB needs to understand that whatever they do, it needs to be communicated and coordinated with the prudential regulators," he said.

The payday industry doesn't see banks closing the gap for low-income consumers if payday lending is greatly scaled back. These businesses—check cashing, money transfer, remittance and payday loans—"are inconsistent with current models of retail banking that depend on streamlined self-service and electronic transactions," said Dennis Shaul, chief executive of the Community Financial Services Association of America, a trade group for payday lenders.

Nick Bourke, who has studied the payday industry at Pew Charitable Trusts, said such loans can be profitable for banks and credit unions. "They already own the customer relationship. They are much more efficient businesses with diverse product lines and lower costs of funds" than payday lenders, he said.

Some credit unions currently offer low-dollar loans but tough restrictions, including relatively low interest-rate caps, have kept most from entering the market. According to Pew Charitable Trusts, such loans represent less than 1% of the overall payday market volume.

Regulators and industry officials recognize that many consumers need short-term loans for emergencies. According to a recent survey by Bankrate.com, only 37% of adults in the U.S. have the necessary savings to cover a $500 car repair or a $1,000 emergency room bill.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

 

(END) Dow Jones Newswires

February 09, 2016 12:25 ET (17:25 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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