US Bank recently launched a new low value loan product. According to the bank’s own description, this is a high cost product, at 70-88% APR.
High-cost loans from banks offer a mirage of respectability. One component of this illusion is the misconception that limiting the payment amount to 5% of gross income means the loan is affordable for most borrowers. But these products will be unaffordable for many borrowers and will eventually erode protections against predatory lending at all levels.
A few years ago, a handful of banks were giving triple-digit interest rates, unaffordable payday loans that were emptying consumers of half a billion dollars a year. Among their many victims was Annette Smith, a widow who depended on Social Security for her income. Annette testified before Congress about a Wells Fargo “direct deposit advance” of $ 500 that cost her nearly $ 3,000. Payday loans are rightly described as “living hell”.
Annette’s experience was hardly an aberration. More than half of deposit loan borrowers had more than ten loans per year. In addition, borrowers with deposit advances were seven times more likely to have their accounts written off than their counterparts who did not take these loans.
But the banks that set those debt traps sank in, fiercely defending them until the 2013 guidelines on regulators’ repayment capacity were finally removed – with one notable exception, Fifth Third, which continues. provide lump sum payday loans.
Today, the threat of widespread high-cost bank lending is once again looming – not so much thanks to regulatory certainty as a deregulation environment that has shown itself eager to respond to the siren song of bank lobbyists. .
Late last year, new leadership in the Office of the Comptroller of the Currency repealed guidelines that had precipitated the end of the Debt Trap Balloon Loans from Wells Fargo, the US Bank and the United States. ‘others. And in May, the agency issued guidelines on installment loans without adequate safeguards over repayment capacity or price. The Federal Deposit Insurance Corp. and Federal Reserve officials are under intense pressure to follow suit. The National Credit Union Administration is also considering a dangerous new program, opposed by many groups, that could facilitate the unlimited reversal of high-cost short-term loans, as well as unaffordable long-term loans.
Meanwhile, consumer groups, civil rights and faith groups across the country continued to voice strong opposition to bank loans above 36% of APR, recording concerns with regulators and banks.
But US Bank broke through the door opened by OCC by announcing its “Simple Loan” product, a three-month installment loan of up to $ 1,000 at an APR that would be illegally high in about 31 states plus DC s. ‘it was granted by a non-banking organization. lender. Their rate is also unpopular. For example, even a lower rate of 60% is considered too high by 93% of voters in North Carolina.
A supposed guarantee of the US Bank product is to limit monthly payments to 5% of gross monthly income. But the data just doesn’t confirm that this measure – which shows a puzzling disregard for spending by financially troubled consumers – is a meaningful affordability standard for high-cost loans. In fact, federal government research of over a million loans has found default rates of over 38% for a payment-to-income ratio of 5% or less.
Common sense does not support this notion either. Payday borrowers have very low incomes, are typically already overburdened with credit, and have average credit scores in the range of 500. And history has shown us that, rather than substituting for other expensive products , additional loans at high cost push borrowers who are already forced into more debt.
Payday loans, including deposit advance loans, have not been shown to reduce overdraft fees. In fact, payday loans have been consistently shown to incur overdraft fees.
Likewise, when banks were providing deposit advance loans at prices half or two-thirds of those of store lenders, with an annual volume of $ 6.5 billion (most, like the volume of store payday loans (generated by the previous unaffordable payday loan), there was no evidence that they made a dent in non-bank payday loans.
High cost installment loans often add to the already unsustainable debt burden. In Colorado, where installment loans average 129% APR, default or default occurred in 23% of all loans in 2016. Even when the loans are repaid, group participants discussion describe how these loans often worsened their already unmanageable debt.
Thus, we know of no evidence to suggest that high cost installment bank loans will lead to a decline in non-bank payday lending. They threaten a race to the bottom, however, as non-bank lenders will seek to relax state usury laws to “compete” with banks.
Banks and credit unions do not need special passes to provide reasonably priced loans. Many custodians provide affordable installment loans, and about 650 credit unions lend under the current NCUA payday loan program rules. There are also 76 million open risk credit cards, which has grown steadily since it was 59 million in 2012.
The key principle is this: credit must be affordable, otherwise it hurts more than it helps. And the extremely high interest rates on loans to financially vulnerable consumers cannot be justified as risk-based daily pricing. Rates, on the contrary, are a red flag signaling a business model not based on repayment capacity. Banks that provide loans through checking accounts have the added benefit of holding the customer’s bank account. This can facilitate their ability to take advantage of loans even if they leave borrowers without enough money to meet their basic needs.
The most effective and efficient way to ensure affordability is to cap interest rates at 36% or less. This idea is strongly supported by Americans from all political walks of life, such as Arizona, Ohio, Montana and South Dakota, where voters have voted overwhelmingly in recent years in favor of the rate limit. Fifteen states and DC have these limits on short-term loans, many more on installment loans, and federal law sets the limit for military service members. The FDIC already has installment loan guidelines advising a 36% cap – and it should strengthen them. Other regulators are expected to join. And the NCUA shouldn’t be expanding its program in an unhealthy way. These actions will help ensure that custodians are helping rather than harming their account holders, and that loans are dreams, not nightmares.