- A Brief History of Big Banks, Payday Loans, and Federal Regulation
- Are Simple Loans an Improvement Over Older Deposit Advance Loans?
- Always Think Critically About Loan Offers
In late September, the New York Times ran a story about how major banks in the U.S. are beginning to offer “an alternative to payday loans.” The Times focuses on a new offering from U.S. Bank, which the bank has branded “Simple Loans.”
As with payday loans generally, U.S. Bank’s Simple Loans are designed to look like a good deal at first glance. Customers get money to pay bills now and agree to pay it back with their future paychecks.
But, also like payday loans, the devil is in the details of this new breed of big bank payday loans. After considering the fees required to take out the loan, these loans cost much more than traditional forms of credit. As such, they remain a bad deal for consumers—especially consumers already struggling to make ends meet.
Article at a Glance
- Prior to 2014, big banks were offering deposit advance loans that competed with traditional payday loans.
- After a crackdown by federal regulators, big banks reduced their activity in this market, but thanks to new rules from the Trump administration, some have decided to jump back in.
- The new crop of big bank payday loans suffers from many of the same problems that plagued earlier versions and are generally a bad idea for consumers.
A Brief History of Big Banks, Payday Loans, and Federal Regulation
As the New York Times article points out, banks like U.S. Bank and Wells Fargo “for a time offered so-called deposit advance loans,” but they “abandoned the loans after regulators clamped down on them in 2013.”
The Times doesn’t go on to explain, but it’s likely referring to actions taken by the Office of the Comptroller of the Currency (OCC), which regulates national banks, and the Consumer Financial Protection Bureau (CFPB), which regulates businesses to protect consumers. The former issued guidance to banks regarding deposit advance loans in 2013, and the latter issued a report warning that it would soon start regulating them.
2013 OCC Guidance: Deposit Advance Products Pose Financial Risks
Specifically, in 2013 the OCC published guidance on the use of what it termed “deposit advance products.” The OCC found that such products “can pose a variety of credit, reputation, operational, compliance, and other risks.” In particular, the OCC pointed out that deposit advance products “share a number of characteristics seen in traditional payday loans,” including:
- High fees (including overdraft fees if the borrower’s account lacked sufficient funds when the bank withdrew the repayment);
- Short, lump-sum repayment schedules;
- Inadequate attention to the consumer’s ability to repay the loan.
These factors increased “the risk that customers may end up using what is marketed as a short-term credit product [in a way] that results in debt over an extended period of time,” because consumers would be forced to take out new loans to cover the other bills they were unable to pay because of their lump-sum repayment.
The OCC warned that it would begin reviewing banks’ deposit advance products to ensure they were appropriately managing those risks.
2013 CFPB Report: Deposit Advance Loans Should be Regulated
The same year, the CFPB published a report on payday loans and deposit advance loans. Like the OCC, the CFPB determined that, although such products can be helpful to consumers in some cases, they “may become harmful for consumers when they are used to make up for chronic cash flow shortages”—something that happened in “a sizable share” of the transactions the CFPB analyzed.
Based on its findings, the CFPB warned that it expected to “use its authorities to provide [consumer] protections” in future regulations.
2017 CFPB Rule
About a year ago, the CFPB made good on its warning by issuing a final rule imposing new restrictions on payday loans, title loans, and similar products that meet the rule’s definition of a “covered loan.”
In response, the OCC rescinded its 2013 guidance and issued new guidance in May of this year. Under its new guidance document, the OCC “encourage[d] banks to offer responsible short-term, small-dollar installment loans . . . to help meet the credit needs of consumers.”
And that brings us back to U.S. Bank’s recent announcement of its new “Simple Loans” product.
Are Simple Loans an Improvement Over Older Deposit Advance Loans?
So how does U.S. Bank’s Simple Loan compare to past offerings? Here are the basic terms of the loan program, according to the bank’s website and the New York Times article:
- Customers can borrow up to $1,000 in $100 increments.
- S. Bank will run a credit check before making a loan, but its underwriting standards will be loosened from those used in its traditional loan offerings.
- Loans are repaid in 3 equal monthly installments, rather than one lump sum.
- For every $100 borrowed, the customer pays a fee of between $12 and $15, depending on whether the payments are automatic or manual.
- If the borrower’s account lacks adequate funds to cover a monthly installment, the bank will wait to withdraw the installment until funds are available, and it will not charge late-payment fees.
Here’s an example from the bank:
If you borrow $400 and select automatic payments, your fee will be $48. You’ll pay back a total of $448 in 3 monthly payments of approximately $149.33 each. Your total cost to borrow (Annual Percentage Rate) will be 70.65%.
Is that a good deal? Probably not—for at least two reasons. First, the APR is quite high. Although it’s lower than what many payday loans charge, it is higher than, say, the APR on a credit card or traditional personal loan. In fact, in California, the interest rate on personal loans generally cannot exceed 10% per year.
And keep in mind that these types of loans target customers with relatively bad credit and cash-flow problems. As with payday loans generally, that market is the one least capable of taking the financial hit from such a high APR.
In addition, although it’s nice that U.S. Bank won’t overdraw a customer’s account to repay his or her Simple Loan, those repayments may still cause trouble for borrowers by making it harder to pay other recurring bills.
Always Think Critically About Loan Offers
Banks, payday lenders, and credit card companies tend to downplay the downsides of their credit offers. Only when you dig into their offering and compare it with other offers (or the possibility of just saving rather than taking out a loan) do you realize that a trap has been set for you.
If you’re struggling to make ends meet and think you must rely on payday loans or big banks’ similar products, there are other options available. One option is to file bankruptcy, which can eliminate many of your other debts, leaving more money in your pocket each month for current bills and expenses.