Pay Day Loans from a Self-Directed IRA?

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Well, maybe not yet. Although technology has made private lending with self-directed retirement accounts more feasible than ever, it may still be difficult to satisfy the immediate needs of pay day borrowers. However, that same technology has developed at an exponential rate, and a recent ruling by the Bureau of Consumer Financial Protection (BCFP) may soon create a new demand for short-term loan originators.

On October 5, 2017, the BCFP issued a rule (RIN 3170-AA40) designed to crack down on predatory lending practices against those who need money right away. Specifically, loans that feature balloon payments (loans with a substantially larger payment due at the end of the term) may only be issued if the lender achieves a reasonable belief that the borrower will repay the loan in full. Furthermore, if a lender makes two failed attempts to draw payments directly from a borrower’s bank account, no additional attempts can be made without authorization from, and subsequent notification of, said borrower. These regulations will take full effect 21 months from the final draft date, which would be July 2019.

The rule is designed to weed out unscrupulous lenders who prey on desperation, but it may also diminish the marketplace for individuals with urgent financial needs. Could self-directed retirement investors capitalize on this opportunity and change the way people seek pay day loans? Available platforms are already pointing us in that direction. By the time the rule is fully implemented in 2019, such platforms will be empowering investors in ways we haven’t even thought of yet.

Blockchain technology has emerged as an efficient method for initiating, managing, and tracking transactions across multiple online exchanges. Every “block” describes the terms and participants of a transaction in the form of an equation. Once the transaction is “approved” through resolution of the equation, the blocks assemble chronologically to form a comprehensive transaction ledger. As the internet continues to redefine commerce, the blockchain presents a fascinating potential to synthesize critical transaction data to a single location at a near-instantaneous rate.

With these possibilities in mind, let’s review three ways a blockchain-based model could one day open the door for investors to issue pay day loans with their retirement accounts:

  • Identity verification and credit checks – By candidly providing identity and credit information, a blockchain platform could help lenders quickly determine a borrower’s ability to repay a loan (and thus satisfy the first criterion set forth by the BCFP rule).
  • Access to fast cash – Blockchain platforms are already helping to facilitate prompt peer-to-peer transactions. This could allow IRA investors to connect with cash-strapped borrowers and initiate a business relationship with the click of a mouse.
  • Fraud prevention – In keeping with (and perhaps enforcing) the BCFP rule, the public and transparent nature of the blockchain could prevent lenders from engaging in nefarious business practices.

A full blockchain application to self-directed IRAs may not be available yet, but 21 months in the world of technology might as well be 21 seconds. If our current technological climate is any indication, self-directed investors will have an efficient avenue for originating pay day loans sooner rather than later. In the meantime, investors can issue loans, purchase fractional debt, or participate in plenty of other private lending activities with their IRA funds. For more information about lending with your IRA, please don’t hesitate to contact New Direction IRA.

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