Underbanked individuals currently face significant risk when accessing short-term credit. While payday loans are the least expensive short-term credit option when compared to alternatives like overdraft fees, they can also have an extraordinarily high cost of borrowing. Unable to pay the cost of the loan, borrowers often find themselves in a vicious cycle that drives them further into debt. This Note sets forth a proposal as to how payday loans can be better regulated to create affordable access to short-term credit. Specifically, this Note advocates for congressional and Federal Reserve intervention in the payday lending market.

This Note first analyzes the current regulatory environment for payday loans. It concludes that the CFPB’s attempts to regulate payday loans at the federal level have largely fallen short, while state attempts to regulate payday loans are threatened by recent OCC rulemaking. Without intervention, underbanked consumers’ access to shortterm credit may be threatened by usurious payday lenders.

The potential for an unregulated market has created a need for federal intervention. On this basis, the second half of this Note argues that congressional intervention in setting a federal usury rate is not only justified, but necessary. This approach is not without its difficulties; a congressional usury rate may drive existing lenders out of the payday lending market for want of profit. Thus, to preserve efficient access to short-term credit, this Note proposes that the Federal Reserve create a short-term lending framework through the layered use of FedAccounts and FedNow.