US bank offers payday loans and is slammed by critics

Loan application form

For years, consumer advocates have decried payday loans as an expensive way to borrow that keeps people trapped in a cycle of high-interest debt. The howls of protest could get louder now that a major bank has offered a similar product.

US Bank, the fifth largest bank nationally, lends up to $1,000 to cash-strapped consumers through its Simple Loan Program. The company has branches in 25 states, including Arizona, where it ranks ninth in statewide filings with $2.2 billion.

The annualized interest rate on this new loan could be close to 71% or even higher. That puts them above the cap for small-dollar loans in Arizona and many other states, critics say.

Various consumer groups are concerned that a major bank has exposed a short-term, high-cost loan like this. But given how many Americans are struggling to make ends meet, the product could prove popular.

A Federal Reserve study this year found that about 40% of Americans said they would struggle to cover a surprise expense of $400. A Bankrate.com survey estimated that 23% of adults have no emergency savings.

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Americans rely on $90 billion in small-dollar short-term lending each year, according to the Office of the Comptroller of the Currency, or OCC, a banking regulatory agency.

“We’ve worked very diligently to ensure that we make this a very accessible product for our customers while helping them position themselves for success,” US Bank spokeswoman Molly Snyder said in response. by email to a question about how the bank will assess whether specific borrowers can afford to repay these loans.

While the new loans will incur high costs, ranging from $12 to $15 for every $100 borrowed, this alternative could help people avoid more serious problems, such as the interruption of public services or eviction. ‘a flat.

“We saw this as a need we could meet, providing customers with a reliable and transparent lending option,” said Lynn Heitman, executive vice president of the U.S. bank, in a prepared statement.

how they work

Prospective customers must first open a U.S. bank account for at least six months, with more than three months of recurring deposits such as paychecks or Social Security benefits.

They could then borrow between $100 and $1,000 in $100 increments, with repayment spread over three months in three fixed installments.

The cost would be $12 for every $100 borrowed if repayments are arranged using automatic checking account deductions. Otherwise, it would be $15 per $100 of loan.

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So if you borrow $400 and agree to make automatic repayments, the fee would be $48. You would repay the $448 in three installments of approximately $149 each. The annualized interest rate or APR would be almost 71%.

With this loan, there are no late fees, missed payment fees, prepayment penalties or other hidden costs, US Bank said. Loan applications must be made online, using the bank’s mobile app.

Rapid analysis, financing

Before lending anything, US Bank pulls a customer’s credit report and analyzes their ability to pay. If approved, the entire process, including transferring funds to the checking account, can be completed in “a matter of minutes,” Snyder said.

After testing the product in 2016 and 2017, the company said feedback indicated consumers appreciate a simple pricing structure and immediate access to funds (after setting up a checking account).

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Many respondents also said they liked that details of loans were given to credit rating agencies, allowing customers to build up a credit history, although this could backfire on those who cannot repay on time.

To minimize the danger that people could become addicted to short-term loans – a critique of payday loans – US Bank allows customers to have only one simple loan outstanding at a time.

After refunding the money, a customer must wait 30 days before looking for another one.

Looser regulations and dissatisfied critics

US Bank unveiled its simple loan after the OCC issued guidelines in May for short-term installment loans. He encouraged banks to grant such loans on the condition that they were reasonably priced and affordable, without defining what that meant.

With these loans, banks “can help consumers switch to more traditional financial products without trapping them in cycles of debt,” the agency said.

Critics, including the Center for Responsible Lending, do not view the loans as consumer-friendly.

“This type of product is not a safe alternative to a payday loan,” Rebecca Borné, the group’s senior policy adviser, said in a statement.

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The organization considers an APR of 36% to be a reasonable dividing line between affordable short-term lending and unacceptable lending. Some payday loans have APRs well above 100%.

Existing interest rate caps in most states “would make this simple loan product illegal if made by a non-bank lender,” Borné added.

(Arizona is among the majority of states that cap rates on small loans. Arizona’s listed limit is 36%, although loan fees can drive the APR up to 54%, according to a 2015 study by the National Consumer Law Center. The law allowing payday loans, potentially at much higher rates, expired here nearly a decade ago.)

Ongoing debt cycle

Cash-strapped borrowers seek out high-cost loans after struggling to make ends meet. In many cases, these struggles are exacerbated by little or no health insurance, unaffordable housing, job instability and low incomes, the Center for Responsible Lending said in a report this year.

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But even after people have received a payday loan, “the fundamental problem – insufficient income relative to expenditure – remains,” the group said.

Critics argue that borrowers may struggle to break out of a cycle of short-term, high-interest loans. An analysis of payday loans by the federal Bureau of Consumer Financial Protection found that borrowers on average accepted 14 cash advances over a 12-month period, underscoring what can become a continuing debt trap spiral.

Impact of high cost loans

In 2013, half a dozen banks began providing high-cost “payday advance” loans, but subsequent guidance from regulators, including the OCC, prompted lenders to suspend their programs.

During that brief period, lending “drained about half a billion dollars from bank customers each year,” the Center for Responsible Lending, Consumer Federation of America, NAACP and five other groups wrote in a letter. to banking regulators.

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These loans, they said, have triggered overdraft fees and charges for having insufficient funds, as well as other harms to consumers, ranging from difficulty paying bills to bankruptcy.

Short-term loans offered by banks and credit unions will also not drive high-cost payday lenders out of business, consumer groups have predicted. Instead, they called state interest rate limits “the most effective measure against predatory lending.”

Now critics fear a new wave of low-cost and high-cost bank lending.

Contact the reporter at [email protected] or 602-444-8616. Are you struggling to make repayments on high cost, low amount loans? fill this form if you want to tell us about it.

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About Judith J. George

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