U.S. Bank’s
The loan features monthly payments that don’t exceed 5% of a borrower’s monthly income, with prices markedly lower than the payday, pawn, auto title or rent-to-own loans for which the effective annual percentage rates often top 300%. A $400, three-month loan from U.S. Bank would cost $48, compared with about $350 from a payday lender.
This welcome development from a bank with more than 3,000 branches across the country could provide a safer option to consumers who have until now been largely excluded from access to affordable small-dollar credit. The announcement follows the Office of the Comptroller of the Currency’s
When the Pew Charitable Trusts surveyed payday loan customers about numerous possible reforms,
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 announcement in May. First, in 2016, representatives of 10 banks and 10 nonprofit public interest organizations
U.S. Bank is just one of several large, national banks that have shown interest in offering safe small installment loans to borrowers if permitted by regulators. Evidence suggests that these loans will be very popular and that as long as banks abide by strong standards for safety and affordability, consumers will be big winners. Americans spend more than $30 billion a year to borrow small amounts of money from lenders outside the banking system, and even in states to which payday lenders point as models, such as Florida, interest rates exceed 200%. So the potential savings to low- and moderate-income borrowers from gaining access to double-digit APR bank loans could top $10 billion annually — 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-dollar loans at scale if their regulator, the National Credit Union Administration, were to authorize them to do so. Its board chairman, Mark McWatters, took
In the Pew survey, four in five payday loan customers said they would prefer to borrow from their banks or credit unions — and all these borrowers already had checking accounts, because it’s a requirement for getting a payday loan. A third of checking account customers who pay high fees to overdraw their accounts report that they do so as a way to borrow money when they’re short on cash; many of them are likely to use new bank or credit union small-dollar loans if they gain that option. Moreover, loan payments would be reported to credit bureaus to help customers establish a successful track record of repayment.
The OCC
To build on this success, the Federal Reserve Board and Federal Deposit Insurance Corp. should echo the OCC’s bulletin and give their supervised institutions the regulatory certainty they need to offer small installment loans. The CFPB should leave in place its 2017 small-dollar loan rule to protect consumers. And other banks should rise to the occasion and offer small-dollar installment loans — giving their millions of customers who today turn to high-cost lenders a much better option when it comes to borrowing money.