Banks urged to take on payday lenders with small, lower-cost loans

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NEW YORK

Feb 19, 2018-

Those who find themselves pinched for cash often turn to high-cost payday lenders. But traditional banks and credit unions could serve that role for borrowers and do it at much lower rates, according to a new proposal from the Pew Charitable Trusts.

Right now, millions of consumers who need cash fast—say, to cover an unexpected car repair or to avoid having their utilities shut off—often end up borrowing a few hundred dollars from lenders who offer an advance or their paycheck or hold their car titles as collateral. Such businesses often charge high fees and punishing interest rates, dragging borrowers into a cycle of debt that’s hard to break, said the report published by Pew on Thursday.

 “Borrowers need a better option,” Alex Horowitz, senior research officer with Pew’s consumer finance project, said in a call this week with reporters. Pew has done extensive research on “underbanked” consumers, who often turn to payday lenders.

Such borrowers, who often have poor credit, can be kept in the “financial mainstream,” Horowitz said, if traditional banks and credit unions would offer small installment loans with safeguards that would protect both the banks and the borrower. Payday borrowers typically have checking accounts—they must show regular deposits as collateral for the loans—and many say they would prefer to borrow from their own bank if they could qualify, Horowitz said. (Some banks do offer small personal loans already, but generally to borrowers with good credit.)

The Consumer Financial Protection Bureau issued a regulation last fall that allows banks and credit unions to issue such loans. Whether banks will actually propose to offer them remains to be seen. But Horowitz said that regulators, including the Office of the Comptroller of the Currency, now appear to be more receptive to the idea.

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. “APRs with three digits are unnecessary for profitability,” 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, 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 centre for regulatory compliance.

Alexander Monterrubio, director of regulatory affairs for the National Association of Federally-Insured Credit Unions, said his organisation 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.

ANN CARRNS​

— © 2018 THE NEW YORK TIMES

Published: 19-02-2018 09:13

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