Banks Want A Piece Of Payday Loan Pie
Financial firms, boosted by the Trump administration’s deregulated pledges, hope to repay short-term, high-interest loans after being ousted from the sector by Obama-era rules. Two major trading groups, the American Bankers’ Association and the Consumer Bankers Association, recently proposed to Treasury Secretary Steven Mnuchin several measures that they said would encourage banks to offer such loans.
The groups are calling for the dismantling of the 2013 guidelines that forced banks to virtually abandon the market. Also on their wish list: the lockout of the Consumer Financial Protection Office deploying the general rules on the proposed payday loan last year, which they say will hamper their return to the sector.
Letting banks and credit unions offer small loans, proponents say, would help the millions of US households that pay billions of dollars in fees every year to lenders who pay annual fees above 300 %.
“We are firmly convinced that we want to serve all of our customer segments,” said Mark Erhardt, senior vice president of retail product management at Fifth Third Bancorp.
Fifth Third, along with Wells Fargo & Co., Regions Financial Corp. and US Bancorp, was among the major banks that previously marketed so-called deposit-advance loans, allowing their clients to borrow in small amounts to cope to the crunches of money between paychecks. Banks like Fifth Third believe that small loans can be profitable if they can offer them at low cost to many clients.
Still, do not expect banks to rush into the sector even if regulation changes, owing to weak loan earnings margins. “The biggest obstacle for community banks to make more loans in small dollars is the cost,” said Joseph Gormley, assistant vice president, regulatory policy, Independent Community Bankers of America. “More or less, it costs them the same amount to make a $ 500 loan as a $ 20,000 loan does.”
The changing political landscape has encouraged supporters of alternative payday loans. Prospects for the CFPB rules on payday loans have been eased due to Republican opposition to the broad regulatory authority of the office. Meanwhile, the Trump government recently named Keith Noreika, a private sector banking attorney, as an interim currency controller after removing Thomas Curry, who had adopted the tougher standards for deposit-lending in 2013.
“A new controller is a fresh start on this issue,” said Nick Bourke, director of consumer finance at Pew Charitable Trusts. “Almost half of the households in this country that live near the edge financially can benefit from a small credit from the banks if it is structured correctly.” Pew estimates that 12 million Americans take out payday loans every year, spending $ 9 billion in loan commissions.
A spokesman for the Office of the Comptroller of the Currency said that the agency’s guidelines encourage banks to respond to short-term credit needs of customers.
Banks pulled out of the market after OCC and Federal Deposit Insurance Corp. imposed stricter lending standards to limit banks’ exposure to risk and reduce costs for consumers. Consumer advocates had criticized the costs of these loans, which often amounted to three digits in terms of annual fees due to high upfront fees.
Mr. Erhardt said that prior to the guidelines, these loans were profitable for Fifth Third, which extended them to “several hundred thousand” customers at a flat rate of 10%. The loans were typically for $ 300 and were paid in two weeks, he said.
The terms offered by some payday loans could be similar if the loan is paid back quickly – but many consumers are unable to come up with the money and take out new payday loans to cover the old ones, ending up in what the Consumer advocates call it a debt trap.
Mr Bourke said that banks need a simple formula that allows them to take out loans quickly and cheaply, while making them safer for borrowers, with features such as keeping payments below 5% of the borrower’s salary and allowing Several months to pay. A handful of banks and lender groups, including Fifth Third and Regions, signed a letter of comments late last year to urge the CFPB to support this format. The CFPB is reviewing the public comments received on the proposed rules.
The Community Financial Services Association, a commercial group of payday lenders, said it would welcome banks to market. “Competition helps foster industry best practices and performance, and … greater innovation,” said group operations director Charles Halloran.
Some credit unions continue to offer alternative payment loans, but say that the new CFPB rule, which requires lenders to assess borrowers’ repayment capacity, could make the line of business too costly.
Wright-Patt Credit Union, an Ohio-based lender with 325,000 members, has 4,000 to 5,000 outstanding short-term loans at any one time, for a total balance of $ 1 million to $ 2 million, according to Chief Executive Doug Fecher . He said the loans allow the credit union to “almost exactly match,” acceptable to a non-profit organization.
“Our goal as a credit union is to help these members who run out of money and have nowhere to go,” Fecher said. “We would like to be cheaper for them than it would be for them to go to a payday lender.”