National bank’s payday lending alternative spurs optimism, concerns

US Bank recently launched a small-dollar loan program aimed at providing an alternative to payday loan stores across the country. This product is the first to be offered by a national bank since a bulletin issued in May by federal regulators encouraged banks to offer short-term, small-dollar installment loans.

The US Bank program is one among a number of alternatives to payday lending to emerge recently. Banks, credit unions, nonprofits and startups have taken steps to provide small-dollar loans to customers at lower costs than traditional payday lenders.

US Bank says the new program is designed to help consumers, but some consumer advocates believe it’s not a safe alternative to payday loans.

A lower price point

National banks, including US Bank, used to offer small-dollar loans at annual percentage rates of 200 to 300 percent before federal regulations forced them to pull out of the business in 2013. Then, in the May bulletin, federal bank regulators encouraged national banks to offer small-dollar loan programs as an alternative to the payday lending industry.

Lynn Heitman, executive vice president, U.S. Bank Consumer Banking Sales and Support, said the program caters to clients in times of unexpected need. “We saw this as a need we could help with by providing customers with a trustworthy, transparent loan option,” Heitman said in a press release.

Paul Woodruff is the Executive Director of Prosperity Connection, a St. Louis nonprofit that provides financial education and payday loan alternatives through its RedDough Money Centers. He also worked on an advisory committee that helped vet US Bank’s new product.

“We know that there is an opportunity and there are ways to be able to offer these services at a lower price point,” Woodruff said. “I think the more institutions that come up with innovative solutions, the bigger the impact is going to be to the payday lending industry.”

The program will offer US Bank customers access to loans of $100 to $1,000 at an APR of 70 to 80 percent. That’s lower than the rates offered by payday lenders in Missouri, whose average APR is more than 400 percent, according to the Missouri Division of Finance.

“The fact that US Bank is offering a product that is about a quarter or a fifth of that rate is huge,” Woodruff said. “Really, the name of the game for this is being able to keep more money in the pockets of low-income consumers.”

Advocates’ concerns

Consumer advocacy groups like the Center for Responsible Lending believe the interest rates offered in US Bank’s new program are still too high. Diane Standaert, director of state policy at the CRL, says that US Bank is just offering another high-cost loan.

“The product by US Bank is simply not a safe payday loan alternative,” Standaert said. “It is another high-cost loan with insufficient protection to prevent people from being trapped in an unaffordable loan that they can’t repay.”

The US Bank program includes a safeguard limiting monthly payments to 5 percent of gross monthly income, but the CRL believes this is insufficient because it does not take existing debt into account. US Bank did not provide a representative to comment despite multiple interview requests from Missouri Business Alert.

Woodruff points out that US Bank’s loan program will allow customers to build credit, something that payday loans do not enable. He also says the program was created to help consumers, not drive revenue for the bank.

“The conversations never revolved around income,” Woodruff said. “The primary motivating factor was to provide a convenient service for people that didn’t have or couldn’t access traditional forms of credit and that they knew were going to payday lenders.”

Industry effects

An advocate for the payday lending industry expressed doubts about the viability of the US Bank program, but he welcomed the competition.

“Banks have historically proved unable or unwilling to offer this service to small-dollar credit consumers,” said Dennis Shaul, CEO of the Community Financial Services Association, a trade group for the payday lending industry. “We, therefore, rightly remain skeptical that banks will actually follow through with providing these critical loans as history has shown. CFSA will continue to welcome competition in the small-dollar credit market because it is a win for consumer choice.”

Standaert believes the addition of new loan programs will only lead to more debt for consumers, not affect the payday lending services the programs are targeting.

“We reject the argument that … additional high-cost, unaffordable products on the market will reduce the volume of other high-cost, unaffordable products on the market,” Standaert said. “What this is doing is just increasing the types of unaffordable debt that people might be buried under.”

The CRL recommends a cap of 36 percent APR on all loans. Woodruff does not believe banks and non-profits like RedDough can remain viable with that rate cap.

“To operate RedDough Money Center, 36 percent is not realistic,” Woodruff said. “It costs a lot to be able to operate these facilities and be able to pay people. I think the Center for Responsible Lending is putting out an idealistic number. We appreciate that they are consumer-forward, but we don’t see it in the numbers and neither did US Bank.”

Woodruff believes that, as long as institutions like US Bank and RedDough are offering consumers lower-cost loans than payday lenders, they are doing their job.

“So long as we keep making progress in lowering the interest rate for what’s out there for people, we’re making an impact,” Woodruff said. “You have to view this as an incremental approach. Slowly but surely, we’re bringing the average cost of these loans down.”

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