Three major banks — Wells Fargo, Truist and Regions Bank — announced plans in January to launch small-dollar loan offerings to customers with checking accounts. If their loans give customers time to repay in affordable installments at fair prices, like the existing small loans from US Bank, Bank of America and Huntington Bank, that’s good news for consumers and that could generate significant savings compared to paydays and other high cost loans. loans.
But not all small loans are safe simply because they come from a bank: costly and risky third-party loan arrangements, better known as rent-a-bank, allow payday lenders to take advantage of a partner bank’s charter to make high-cost loans that circumvent state laws and consumer warranties.
Several state-chartered banks overseen by the Federal Deposit Insurance Corp. (FDIC) have in recent years begun providing high-cost loans to payday lenders. As the Office of the Comptroller of the Currency (OCC), the FDIC and other federal banking regulators consider new guidance on how banks can better manage third-party risk, they should take this opportunity to review the high-cost lending partnerships among a few. FDIC-regulated banks.
Research from Pew Charitable Trusts has identified the adverse effects of unaffordable short-term loans on the financial stability of many low-income consumers. Americans spend more than $30 billion borrowing small amounts of money from payday lenders, auto titles, pawnshops, rent-to-own and other high-cost lenders. Payday loan borrowers end up paying an average of $520 in five-month fees per year for an average loan of $375. Fortunately, state laws and federal guidelines have allowed some lower-cost loans to reach the market, proving that effective rules and lower-cost options can save borrowers billions of dollars each year while maintaining a widespread access to credit.
Outside of the banking system, many states allow payday loans with few collateral, while others choose to effectively ban payday loans. And some states allow payday loans, but only with strong consumer protections. However, even in states that protect consumers, unlicensed payday lenders are increasingly using bank lease agreements to make loans that would otherwise be prohibited.
For example, in eight states, bank lease lenders charge as much or more than state-licensed payday lenders. The spread of these bank lease agreements should alarm federal regulators from the OCC, the Consumer Financial Protection Bureau, and especially the FDIC, as these partnerships result in higher costs and consumer harm instead of expand access to better credit.
Our research revealed that consumers resort to high cost loans because they are in financial difficulty and often live from paycheck to paycheck. Lenders are well aware that these consumers are looking for quick and convenient loans, so they may charge excessive fees. Without strict rules for affordable payments and fair prices, consumers end up in long-term debt and report feeling taken advantage of.
Small loans can help meet the needs of financially insecure consumers. But a safer and far less costly solution than bank lease arrangements would be for banks to follow the lead of Bank of America, US Bank and Huntington Bank in offering small installment loans or lines of credit directly to their customers. – with prices, affordable payments and a reasonable repayment term. The offerings from these banks cost borrowers at least five times less than those offered by FDIC-supervised bank lease lenders. Pew found that with affordable loans like these, millions of borrowers could save billions a year.
As vulnerable consumers continue to face volatility in income and spending, the FDIC, which will have new leadership, should act decisively to stop risky bank lease loans – which have well-lost rates. higher than any other product of the banking system. Normally, bank examiners would shut down such dangerous programs, but the poor results of these loans are hidden from examiners – because banks, which typically don’t keep loans on their books, quickly sell most or all of them to lenders on salary. But their high loss rates nonetheless show up in payday lender earnings reports. Thus, it is still possible for the FDIC to recognize that these are high-risk, high-loss payday loans.
Small, affordable installment loans from banks help consumers, and regulators should welcome them. But rent-a-bank loans are not affordable and have no place in the banking system.
alexander Horowitz is a senior executive and Gabe Kravitz is an executive of The Pew Charitable Trusts Consumer Credit Project.