Bank regulators ready to make big decisions about small loans

The country’s three federal bank regulators – the Federal Deposit Insurance Corp. (FDIC), Federal Reserve Board and Office of the Comptroller of the Currency (OCC) – have agreed to pursue joint action on small loans, according to FDIC President Jelena. McWilliams. To date, most banks have not offered small installment loans due to regulatory uncertainty, but an announcement from these agencies clarifying their expectations could significantly boost the market for alternatives to payday loans and similar loans. at high cost.

Depending on the choices regulators make over the next few months, borrowers could see a return to expensive one-time deposit advances, payday loans that had been offered by some banks, or they could have access to small loans. much more affordable installments, which are repayable over multiple paychecks and generally have terms of more than 45 days. Their deliberations will likely lead to one of three general outcomes:

1. Banks would once again offer bad deposit advances, which are loans with three-digit annual percentage rates (APRs) that must be repaid when the borrower’s next payday.
2. Banks would maintain the status quo and offer few small loans to customers, and borrowers would continue to take on expensive payday and other non-bank loans.
3. Banks would issue loans in small, affordable installments, at prices about six times lower than payday loans.

Scenario 1: Cancel deposit advance instructions and issue loan instructions without small installments.

Prior to 2014, there were no guidelines from banking regulators on affordable alternatives to payday loans, nor restrictions on lump sum payday loans, known as deposit advances. At that time, banks did not have affordable large-scale loan programs for small dollars. Instead, six banks nationwide, including some large, have issued deposit advances. The most common pricing was 10% per pay period, which translates to an APR of 260% for a two-week loan.

As with payday loans, most borrowers could not afford to repay the loans and cover their expenses. they paid off the loans and quickly took on new ones over and over again. But deposit advances fell sharply after regulators issued guidelines discouraging them in early 2014. If regulators re-authorize such loans, deposit advances are expected to return. Banks are unlikely to offer affordable, low-installment loan alternatives if regulators do not establish clear guidelines that encourage this option.

A return to policies in force before 2014

No guidelines for small installment loans and no restrictions on bank payday loans (deposit advances)

Scenario 2: Retain deposit advance guidelines without small installment loan guidelines.

If regulators keep the deposit advance guidelines that the FDIC finalized in 2014, and if they apply to all small loans, banks are unlikely to offer credit to consumers who now turn to high cost non-bank loans. The guidelines discourage loans that pose serious risks to consumers, such as lump sum deposit advances, but its strict underwriting requirements could also deter banks from offering lower-cost small-payment loans. Widespread application of the deposit advance guidelines to all small loans would likely result in conditions similar to 2014-2018, when small loans issued by banks were available.

Rules similar to those in place from 2014 to 2018

No guidelines for affordable loans, restrictions in place on bank payday loans (deposit advances)

* One bank offered a less expensive version of the deposit advance during this period to some customers.

Scenario 3: Clarify deposit advance guidelines and issue small installment loan guidelines.

The third option for banking regulators would be to apply the guidelines on deposit advances to short-term loans (single payment loans or loans with terms of 45 days or less) and also to define clear guidelines, modeled on those published by the OCC in May 2018 — for small installment loans over 45 days. Such clarity would move banks away from deposit advances with lump-sum payments and triple-digit APRs, which worked poorly for consumers before 2014, while welcoming small installment loans repaid over time with simple but strong underwriting and two-digit APRs, similar to Simple loan product launched by the American bank in September.

An updated approach that benefits consumers

2018 OCC Guidelines for Affordable Loans and Restrictions on Bank Payday Loans (Deposit Advances)

Scenario 3 would benefit payday loan borrowers the most and enjoy the greatest public support. In a 2017 survey, The Pew Charitable Trusts assessed perceptions of various options. Eighty percent of the public and 86 percent of payday loan borrowers saw just a potential loan of $ 400 over three months at a cost of $ 60. Meanwhile, 70% of those polled said they would view a bank more positively if it made such loans. Even though the loans would have higher interest rates than credit cards, the public viewed them positively because they cost six times less than payday loans. Only 1 in 5 said a month or less would be enough to pay off $ 500, as had been required for deposit advances.

Pew has developed and published standards for affordable and profitable bank loans. If these loans became widely available, millions of payday borrowers and other high cost borrowers could save billions of dollars each year by opting for them. If regulators choose the third option described here, it could soon become a reality.

Alex Horowitz is Senior Research Fellow in The Pew Charitable Trusts Consumer Finance Project.