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American bank offers payday loans and is criticized by critics

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For years, consumer advocates have decried payday loans as an expensive way to borrow and a way that keeps people trapped in a cycle of high interest debt. The howls of protest might get louder now that a major bank has offered a similar product.

US Bank, the fifth national bank, lends up to $ 1,000 to cash-strapped consumers through its simple loan program. The company has branches in 25 states, including Arizona, where it ranks ninth in statewide deposits with $ 2.2 billion.

The annualized interest rate on this new loan could reach almost 71% or even more. This puts them above the ceiling for small dollar loans in Arizona and many other states, critics say.

Various consumer groups are concerned that a major bank has unveiled a short-term, high-cost loan like this. But given the number of Americans struggling to make ends meet, the product could prove popular.

A study by the U.S. Federal Reserve this year found that about 40% of Americans said they would struggle to cover a surprise expense of $ 400. A Bankrate.com survey estimated that 23 percent of adults have no emergency savings.

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Americans depend on $ 90 billion in short-term loans and small dollars each year, according to the Office of the Comptroller of the Currency or OCC, a banking regulator.

“We have worked very diligently to ensure that this is a very accessible product for our customers while helping them position themselves on the path to success,” said Molly Snyder, spokesperson for the US bank, in response. via email to a question on how the bank will assess whether specific borrowers could afford to repay these loans.

While the new loans will come with steep costs, ranging from $ 12 to $ 15 for every $ 100 borrowed, this alternative could help people avoid more serious issues, such as disruption of utilities or eviction from a flat.

“We saw this as a need that we could help with, providing clients with a reliable and transparent loan option,” said Lynn Heitman, executive vice president of the US bank, in a prepared statement.

How they work

Prospective clients must first open a checking account with a U.S. bank for at least six months, with more than three months of recurring deposits such as paychecks or Social Security benefits.

They could then borrow between $ 100 and $ 1,000 in increments of $ 100, with repayment spread over three months in three fixed installments.

The cost would be $ 12 for every $ 100 borrowed if repayments are made by direct debit from the checking account. Otherwise, it would be $ 15 per $ 100 loan.

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So if you borrow $ 400 and agree to make automatic repayments, the fee would be $ 48. You would pay off the $ 448 in three installments of about $ 149 each. The annualized interest rate or APR would be almost 71%.

With this loan, there are no late fees, non-payment fees, prepayment penalties, or other hidden charges, the U.S. bank said. Credit applications must be made online, via the bank’s mobile application.

Quick analysis, financing

Before lending anything, the US bank extracts a customer’s credit report and analyzes their ability to pay. If approved, the whole process, including transferring funds to the checking account, can be completed in “a matter of minutes,” Snyder said.

After testing the product in 2016 and 2017, the company said reviews indicated that consumers appreciated a simple pricing structure and immediate access to funds (after establishing a checking account).

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Many respondents also said they liked loan details to be reported to rating agencies, allowing clients to build up a credit history, although this can backfire on those who cannot repay on time.

To minimize the risk of people becoming addicted to short-term loans – a review of payday loans – the US bank allows customers to have only one simple loan outstanding at a time.

After refunding the money, a customer must wait 30 days before looking for another.

More flexible regulations and dissatisfied critics

The US bank unveiled its simple loan after the OCC issued guidelines in May for short-term installment loans. He encouraged banks to make such loans on condition that they are reasonably priced and affordable, without defining what it means.

With such loans, banks “can help consumers adopt more mainstream financial products without trapping them in debt cycles,” the agency said.

Reviewers, including the Center for Responsible Lending, don’t see loans as user-friendly.

“This type of product is not a safe alternative to a payday loan,” Rebecca Borne, the group’s senior policy adviser, said in a statement.

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The organization considers an APR of 36% to be a reasonable dividing line between affordable short-term loans and unacceptable loans. Some payday loans have APRs well over 100%.

The existing interest rate caps in most states “would make this simple loan product illegal if made by a non-bank lender,” Borne added.

(Arizona is among the majority of states with rate caps on small loans. The limit shown for Arizona is 36%, although loan fees can increase the APR to 54%, according to a 2015 study from the National Consumer Law Center. The law allowing payday loans, potentially with much higher rates, lapsed almost ten years ago.)

Debt cycle underway

Cash strapped borrowers look for high cost loans after struggling to make ends meet. In many cases, these struggles are exacerbated by little or no health insurance, unaffordable housing, job instability and low incomes, the Center for Responsible Lending said in a report this year.

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But even after people received a payday loan, “the fundamental problem – insufficient income relative to expenses – remained,” the group said.

Critics argue that borrowers may find it difficult to exit a cycle of short-term, high-interest loans. An analysis of payday loans by the Federal Bureau of Consumer Financial Protection found that borrowers on average accepted 14 cash advances over a 12-month period, highlighting what can become a continuing spiral of debt trap .

Impact of high cost loans

In 2013, a half-dozen banks began providing high-cost “deposit advance” loans, similar to payday loans, but subsequent guidance from regulators, including the OCC, prompted lenders to suspend their programs.

During that brief period, the loans “drained about half a billion dollars from bank customers each year,” the Center for Responsible Lending, the Consumer Federation of America, the NAACP and five other groups wrote in a letter. to banking regulators.

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These loans, they said, have triggered overdraft fees and charges for insufficient funds, as well as other harm to consumers, ranging from difficulty paying bills to bankruptcy.

Short-term loans offered by banks and credit unions also won’t bankrupt more expensive payday lenders, consumer groups have predicted. Rather, they called government interest rate limits “the most effective measure against predatory lending.”

Critics today fear a new wave of low-cost, high-cost bank loans.

Contact the reporter at [email protected] or 602-444-8616. Are you struggling to make payments on low cost, high cost loans? Fill in this form if you want to tell us about it.

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