A large bank offers payday loans. Will others follow suit?

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The U.S. bank said it would offer small, almost instant loans to its customers, becoming the first bank to offer such a product since federal regulators led the way earlier this year, amid lingering concerns about the costs of payday loans.

The Minneapolis institution, the nation’s fifth largest commercial bank, said its checking account holders will be able to borrow $ 100 to $ 1,000 quickly, enough to cover many emergency expenses, with its simple loan offer. Borrowers have three months to repay, at a cost of $ 12 for every $ 100 borrowed, which equates to an annual interest rate of about 71%.

The bank admits it’s expensive, calling the loans “high cost” on its website, but they are considerably cheaper than payday loans, which give borrowers less time to repay and come with low interest rates. interest often above 400%. In many cases, these loans could also be a better deal than bank overdraft fees, which, considered short-term loans, can have effective interest rates of up to thousands of percent.

Customers who need cash fast “can solve that need with many options – it can be a credit card or a credit card advance, or it can be a payday loan,” said Lynn Heitman, vice-president. – Executive Chairman of US Bank, which has more than 3,000 branches in 26 states. “We think this product falls in the middle of that spectrum. “

In contrast, credit card advances for people with less than maximum credit lines can carry interest rates of 25% or more and come with minimal fees.

The big banks offered small loans, often referred to as advances on deposits, but most, including the US bank, withdrew after federal regulators issued tough new rules in 2013. Thomas Curry, then chief of the bureau of the Comptroller of the Currency, a leading banking regulator, said the loans could “trap customers in a cycle of high-cost debt that they are unable to repay.”

These advances were often similar to payday loans in that they had to be repaid all at once. And because advances came with a fixed fee that didn’t change with how long customers needed the money, effective interest rates could sometimes exceed 100%.

Now, however, regulators have said they want banks to re-enter this line of business.

Last year, the OCC, now led by Trump-appointed Joseph Otting and a former Los Angeles bank executive, repealed those 2013 rules. And in May, the OCC issued a bulletin encouraging banks to provide small loans, including to clients with poor credit who may not be eligible for other types of loans.

Otting told a congressional hearing in June that excluding banks from the small loan market only increased business for payday lenders and other expensive alternatives. He also indicated that he had met with the leaders of the largest banks to encourage them to offer these products.

“I am convinced that more banks will enter this sector,” he said in June.

Other banks are considering offering small loans themselves, but none have made any progress. Wells Fargo spokesperson Stacy Kika said the bank “is always looking for a wide variety of innovative and effective ways to help [customers] achieve their goals.

Dennis Shaul, Managing Director of the Community Financial Services Assn. of America, said he was not worried that banks could put payday lenders out of business, and he questioned whether US Bank and others would continue to offer these long-term loans.

“CFSA has always welcomed competition in the low dollar credit market,” Shaul said. “Having said that, banks in the past have tried to offer these loans and have found them unprofitable.”

While some advocacy groups have pushed banks to offer these types of loans, others are concerned that US Bank’s new offering is still too expensive and may prove unaffordable for many customers.

Graciela Aponte-Diaz of the nonprofit Center for Responsible Lending said she was particularly concerned about clients of U.S. banks taking larger loans under the new program, as borrowers have only three months to to reimburse.

“It’s dangerous for a $ 500 or $ 1,000 loan,” she says. “Three months is not a long time to find that much money.”

Aponte-Diaz also noted that although federally regulated banks are not required to obey state lending laws, rates on new U.S. bank loans are higher than the lending laws of 31. States, including California. Under California law, a lender could not charge more than 27% interest on a $ 500 loan.

“We believe the loans should be reasonably priced,” Aponte-Diaz said. “That’s really high for a small dollar loan. “

Heitman, however, said the price is low enough to make these loans attractive to many customers, and high enough to cover the risk of lending to borrowers with poor credit while also being profitable for the bank.

She declined to give specific underwriting criteria for the loans, but said the bank looked at borrowers’ credit reports to see how much debt they had and also looked at recurring payments such as rent to see if borrowers had available. sufficient additional income to pay loan repayments. She said the loans are “very accessible” on the basis of credit scores, suggesting that they are available to borrowers who will grant subprime loans.

The loans are available to customers who have had a checking account with a US bank for at least six months and whose paychecks are deposited directly into their account. A borrower can apply online and, if approved, can get the loan deposited into their account within minutes.

Payments are automatically deducted from borrowers’ current accounts. Customers can decline automatic payments, but loans are more expensive – $ 15 for every $ 100 borrowed, which equates to an annual interest rate of 88%.

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UPDATES:

4:53 p.m .: Updated with comments from Wells Fargo and the Community Financial Services Assn. from America.

This article was first published at 2:20 p.m.

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