U.S. Bank says it will offer nearly instant small loans to its customers, becoming the first bank to provide such a product since federal regulators cleared the way earlier this year amid continuing concerns over the costs of payday loans.
The Minneapolis institution, the nation’s fifth-largest commercial bank, said its checking account holders will be able to quickly borrow $100 to $1,000, enough to cover many emergency expenses, through its Simple Loan offering. Borrowers have three months to repay, at a cost of $12 for every $100 borrowed — equivalent to an annual interest rate of about 71%.
The bank acknowledges that’s expensive, calling the loans “high cost” on its website, but they’re dramatically cheaper than payday loans, which give borrowers less time to repay and come with interest rates that often top 400%. In many cases, these loans also could be a better deal than bank overdraft charges, which, viewed as short-term loans, can have effective interest rates running into the thousands of percent.
Customers who need cash fast “can solve that need with many options — it could be a credit card or credit card advance, or it could be a payday loan,” said Lynn Heitman, an executive vice president at U.S. Bank, which has more than 3,000 branches in 26 states. “We believe this product fits in the middle of that spectrum.”
By contrast, credit card advances for people whose credit lines are not maxed out might carry interest rates of 25% or more and come with a small fee.
Big banks used to offer small-dollar loans, often called deposit advances, but most, including U.S. Bank, pulled out after federal regulators issued strict new rules in 2013. Thomas Curry, then head of the Office of the Comptroller of the Currency, a top bank regulator, said the loans could “trap customers in a cycle of high-cost debt that they are unable to repay.”
Those advances were often similar to payday loans in that they had to be repaid in one lump sum. And because the advances came with flat fees that didn’t change based on how long customers needed the money, the effective interest rates could sometimes top 100%.
Now, though, regulators have said they want banks to get back into this line of business.
Last year, the OCC, now led by Trump appointee and former Los Angeles bank executive Joseph Otting, rescinded those 2013 rules. And in May, the OCC issued a bulletin encouraging banks to make small loans, including ones to customers who have weak credit and might not qualify for other types of loans.
Otting said during a congressional hearing in June that pushing banks out of the market for small loans has only led to more business for payday lenders and other pricey alternatives. He also said he had met with the chief executives of the largest banks to encourage them to offer these products.
“I’m confident more banks will enter into that sector,” he said in June.
Other banks are considering small-dollar loan offerings of their own, but none have moved forward. Stacy Kika, a spokeswoman for Wells Fargo, said the bank is “continuously seeking a wide variety of innovative, effective ways to help [customers] reach their goals.”
Dennis Shaul, chief executive of payday lending trade group Community Financial Services Assn. of America, said he’s not concerned that banks could put payday lenders out of business, and he questioned whether U.S. Bank and others will continue to offer these loans in the long term.
"CFSA has always welcomed competition in the small-dollar credit market,” Shaul said. “That said, banks in the past have tried to offer these loans and found them unprofitable.”
Though some advocacy groups have pushed for banks to offer these types of loans, others worry that U.S. Bank’s new offering is still too expensive and could prove unaffordable for many customers.
Graciela Aponte-Diaz of the nonprofit Center for Responsible Lending said she’s particularly concerned about U.S. Bank customers who take out larger loans under the new program because borrowers only have three months to repay.
“It’s dangerous for a loan of $500 or $1,000,” she said. “Three months is not very long to come up with that much money.”
Aponte-Diaz also noted that while federally regulated banks are not required to obey state lending laws, the rates on the new U.S. Bank loans are higher than would be allowed under the lending laws of 31 states, including California. Under California law, a lender could charge no more than 27% interest on a $500 loan.
“We think loans should be reasonably priced,” Aponte-Diaz said. “This is really high for a small-dollar loan.”
Heitman, though, said the price is low enough to make these loans attractive to many customers, and high enough that it covers the risk of lending to borrowers with weak credit while also being profitable for the bank.
She declined to give precise underwriting criteria for the loans but said the bank is looking at borrowers’ credit reports to see how much debt they have and also looking at recurring payments such as rent to see if borrowers have enough extra income to afford loan payments. She said the loans are “very accessible” based on credit scores, suggesting they are available to borrowers will subprime credit.
The loans are available to customers who have had a U.S. Bank checking account for at least six months and have their paychecks deposited directly into their accounts. A borrower can apply online and, if approved, can get the loan deposited into their account in a few minutes.
Payments are deducted automatically from borrowers’ checking accounts. Customers can opt out of automatic payments, but then the loans are more expensive — $15 per $100 borrowed, equivalent to an annual interest rate of 88%.