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U.S. Bank’s Simple Loan Product Is Not A Safe Payday Loan Alternative

Tuesday, September 11, 2018
Rebecca Borné

WASHINGTON, D.C. - U.S. Bank recently rolled out its online Simple Loan product where borrowers can take out loans of $100 to $1,000. The borrower would be required to pay the loan back over three monthly installment payments with an annual percentage rate (APR) of 70% to 88%, well over the 36% APR cap that consumer advocates and civil rights organizations recommend. The 36% finds precedent in the Military Lending Act for loans to military servicemembers and in many state laws.

This product marks the first major rollout of a new national bank installment loan product since the OCC’s installment loan bulletin issued in May. That bulletin advised that costs be reasonable without advising a specific rate limit.

"This type of product isn’t a safe alternative to a payday loan, and we reject the notion that bank loans as high as 70 to 88% APR will drive out higher-priced credit by non-banks,” said Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending (CRL). “To the contrary, high-cost lending by banks will undermine the most effective measure against predatory lending: state interest rate limits. Rate caps in approximately 31 states plus DC would make this Simple Loan product illegal if made by a non-bank lender. In addition, underwriting should require that a borrower have the ability to repay the loan, while meeting ongoing expenses, without reborrowing. Loan payments of up to 5% of a borrower’s gross income will likely be unaffordable for many financially distressed borrowers.”

New research underscores the dangers of high-cost installment loans. (PDF) Colorado borrowers in many cases reported that unaffordable payments on these loans triggered significant additional financial hardships, either immediately or down the road.

In May, CRL and several consumer and civil rights organizations across the country urged financial regulators to ensure bank loans do not exceed a cost of 36% APR. In addition, the groups urged regulators to require banks to determine whether borrowers have the ability to repay their loans based on an assessment of the borrower’s income and expenses. A copy of the letter was sent to U.S. Bank and a number of other banks.

While the OCC has already rescinded its deposit advance guidance and issued an installment loan bulletin for nationally chartered banks like U.S. Bank, the Federal Deposit Insurance Corporation (FDIC) is considering how it will address these issues with the state-chartered banks it supervises. Last month, consumer and civil rights organizations wrote a letter to the head of the FDIC urging the Chair to keep in place the agency’s guidance advising ability-to-repay determinations on bank payday loans and on affordable installment loans at 36% or less.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Ricardo Quinto at ricardo.quinto@responsiblelending.org.