Momentum strengthens for small loans | Payments Source


The U.S. bank’s announcement this week that it will begin offering a new small-installment loan could be the start of a new era – one in which regulated banks and credit unions are offering small-amount loans that most consumers can afford.

The loan has monthly payments that do not exceed 5% of a borrower’s monthly income, with prices significantly lower than those for payday, pawn, auto or rental loans with option to buy for which the rates of annual percentages often exceed 300%. A three-month $ 400 loan from the US Bank would cost $ 48, compared to about $ 350 from a payday lender.

This welcome development of a bank with more than 3,000 branches across the country could provide a safer option for consumers who have so far been largely excluded from access to affordable, low dollar credit. The announcement follows the May bulletin from the Office of the Comptroller of the Currency, which, for the first time, gave traditional providers the regulatory certainty they need to offer affordable installment loans.

When the Pew Charitable Trusts asked payday loan clients about the many possible reforms, the most popular was to allow banks and credit unions to offer small loans at prices significantly lower than those charged by payday lenders. salary. Pew’s research found – and US Bank actions now show it – that banks and credit unions have such a strong competitive advantage that they can offer loans at prices six to eight times lower than those of banks. payday lenders while making a profit. Annual percentage rates have to be higher than credit cards, of course, but neither the public nor the payday loan borrowers we surveyed see this as unfair until APRs go above double digits.

Until recently, a lack of regulatory clarity on what is and is not acceptable has prevented banks from offering small loans. But that started to change even before the OCC’s announcement in May. First, in 2016, representatives from 10 banks and 10 nonprofit public benefit organizations agreed to reasonable standards that would make large-scale, profitable, and consumer-friendly lending possible. Then, last October, the Federal Bureau of Consumer Financial Protection released rules that leave providers free to offer safe, low-installment loans and lines of credit with few restrictions if the loans have a term of. more than 45 days. At the same time, technological innovation has enabled automated underwriting and origination, with loan applications being processed through mobile or online banking and the product deposited into customer accounts on the same day, allowing banks save money and time; and allow consumers to borrow from banks faster. than they can from payday lenders.

US Bank is just one of many large national banks that have expressed interest in offering safe, small-installment loans to borrowers if regulators allow it. Evidence suggests that these loans will be very popular and that as long as banks meet strict standards of safety and affordability, consumers will be the big winners. Americans spend more than $ 30 billion a year borrowing small amounts of money from lenders outside the banking system, and even in states that payday lenders point to as models, like Florida, interest rates exceed 200%. So the potential savings for low- and moderate-income borrowers by accessing double-digit APR bank loans could reach $ 10 billion per year, more than the federal government spends on many anti-poverty programs.

Credit unions have the same competitive advantages as banks, which would allow them to also offer small-scale loans if their regulator, the National Credit Union Administration, allows them to do so. Its chairman of the board, Mark McWatters, took a promising step in that direction this year by posting a request for comment on a new alternative payday loan program that could make these smaller, lower-cost loans achievable for co-ops. credit.

In the Pew survey, four in five payday loan customers said they would prefer to borrow from their banks or credit unions – and all of those borrowers already had checking accounts, as that’s a requirement for getting a loan. on salary. One-third of chequing account customers who pay high fees to overdraw their accounts say they do so as a way to borrow money when they are strapped for cash; many are likely to use new, low-value bank or credit union loans if they get this option. Additionally, loan payments would be reported to credit bureaus to help customers establish a successful repayment history.

Standards for these small loans are needed to protect consumers, enable automation, and simplify regulatory compliance. Research shows that setting payments at 5% of income, as US Bank has done, is affordable for borrowers while still allowing lenders to be paid back over several months. Some public interest groups and banks have already expressed support for this moderate standard.

The OCC seems to recognize that many bank customers currently have no good way to cover their expenses when they are in a financial bind and also seems to recognize the negative consequences of payday loans. By providing secure credit to troubled customers, banks can solve both of these problems with small installment loans. The US bank’s announcement shows that it is possible to offer such loans without going back to the bad old days of “deposit advance” products that simply mimicked lump sum payday loans.

To build on this success, the Federal Reserve and Federal Deposit Insurance Corp. should echo the OCC newsletter and give their supervised institutions the regulatory certainty they need to offer small installment loans. The CFPB should leave its 2017 small loan rule in place to protect consumers. And other banks are expected to step up to the plate and offer low-value installment loans, giving their millions of customers who turn to high-cost lenders today a much better option when it comes. to borrow money.


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