Banks Urged to Take On Payday Lenders With Small, Lower-Cost Loans

Banks Urged to Take On Payday Lenders With Small, Lower-Cost Loans

Under Pew’s guidelines, small bank loans should have payments of no more than 5 percent of a borrower’s paycheck, payments should not be allowed to cause overdraft fees, and annual percentage rates should be no more than “two digits” — not the triple-digit rates offered by payday lenders. “A.P.R.s with three digits are unnecessary for profitability,” Mr. Horowitz said.

To make such loans workable for borrowers and profitable for banks, underwriting — the review that borrowers undergo to determine if they qualify for a loan — should be automated, the report said. That means banks would mainly make the loans through online and mobile banking applications, and may need to factor in criteria other than traditional credit scores. For instance, banks might consider the length of the customer’s relationship with the bank and the frequency of the customer’s deposits.

Speed is crucial, Mr. Horowitz said, because unless the loans are available quickly and easily, borrowers will go elsewhere, since they typically seek payday loans when they are in distress. “Borrowers will choose payday loans,” he said, “if banks aren’t fast.”

Banks are in a good position to offer such loans, if regulators approve, Pew suggested. The average payday loan customer borrows $375 over five months and pays $520 in fees, while banks and credit unions could profitably offer the same amount over the same period for less than $100.

Pew said certain components of its proposal, including the 5 percent payment cap, had been supported in the past in public comments by several banking groups.

“Many people want and rely on small-dollar credit, and banks are eager to expand their offerings of trusted and responsible services to these borrowers,” said Virginia O’Neill, senior vice president of the American Bankers Association’s center for regulatory compliance.

Alexander Monterrubio, director of regulatory affairs for the National Association of Federally-Insured Credit Unions, said his organization supported more options for its membership base, “including responsible small-dollar lending options.”

A spokesman for one large bank, Fifth Third, said in an email that “we believe banks need to be able to meet their customers’ short-term, small-dollar” needs.

Proposals for small installment loans could face opposition from the payday lending industry. Regulators under the Trump administration have also become more favorable to the industry, which would face new competition.

The major lobbying group representing payday lenders, the Community Financial Services Association of America, didn’t immediately respond to a request for comment. In the past, the group’s chief executive, Dennis Shaul, has said that the payday industry welcomes competition, but that he is skeptical that many banks actually want to enter the small-dollar loan market.

Here are some questions and answers about small installment loans:

Didn’t banks try something like this before?

Some banks offered “deposit advances” before regulators halted them in 2013. The advances were due in a lump sum on the borrower’s next payday, often at a fee of 10 percent per pay period, or an annual percentage rate of 260 percent. Pew said it opposed allowing banks to offer such “unaffordable” advances again.

What sort of fees might banks charge for small installment loans?

According to Pew, 70 percent of Americans said they would look favorably on their bank or credit union if it offered a $400, three-month loan for $60, and 80 percent said they believed such a loan would be fair.

Where can I get a small loan now if my credit isn’t great but I don’t want to use a payday lender?

Some small credit unions offer payday alternative loans, or PALs, in amounts from $200 to $1,000. Typically, borrowers must be a member of the credit union for at least one month before becoming eligible for the loans.

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