By Yuka Hayashi
WASHINGTON -- Some banks want to take on payday lenders.
Financial firms, spurred by the Trump administration's promises to deregulate, hope to return to offering short-term, high-interest loans after being pushed out of the sector by Obama-era rules. Two leading trade groups, the American Bankers Association and Consumer Bankers Association, recently proposed to Treasury Secretary Steven Mnuchin several steps they say would encourage banks to offer such loans.
The groups call for scrapping 2013 guidelines that forced banks to virtually abandon the market. Also on their wish list: blocking the Consumer Financial Protection Bureau from rolling out the sweeping rules on payday lending proposed last year, which they say would hamper their return to the sector.
Letting banks and credit unions offer small loans, proponents say, would help the millions of U.S. households that pay billions of dollars in fees each year to payday and auto-title lenders that often charge annual interest rates exceeding 300%.
"We feel very strongly that we want to serve all our customer segments," said Mark Erhardt, senior vice president of retail product management at Fifth Third Bancorp.
Fifth Third -- along with Wells Fargo & Co., Regions Financial Corp. and U.S. Bancorp -- was among the large banks that previously marketed so-called deposit advance loans, which allowed their customers to borrow small amounts to weather cash crunches between paychecks. Banks like Fifth Third believe small loans can be profitable if they can offer them cheaply to a lot of customers.
Still, don't expect banks to rush into the sector even if regulation changes, owing to the loans' thin profit margins. "The biggest hurdle to community banks making more small-dollar loans is cost," said Joseph Gormley, assistant vice president of regulatory policy at the Independent Community Bankers of America. "More or less, it costs them the same amount to make a $500 loan as it does a $20,000 loan."
The shifting political landscape has emboldened supporters of payday-alternative loans. The prospects for the CFPB's payday-loan rules have dimmed owing to Republican opposition to the bureau's broad regulatory authority. Meanwhile, the Trump administration recently appointed Keith Noreika, a private-sector banking lawyer, as acting comptroller of the currency after removing Thomas Curry, who had adopted the tougher standards for deposit advance loans in 2013.
"A new comptroller is a fresh start on this issue," said Nick Bourke, director of consumer finance at Pew Charitable Trusts. "Almost half of the households in this country who are living close to edge financially can benefit from small credit from banks if it's structured in a right way." Pew estimates 12 million Americans take out payday loans each year, spending $9 billion on loan fees.
A spokesman for the Office of the Comptroller of the Currency said the agency's guidelines encourage banks to respond to customers' short-term credit needs.
Banks all but withdrew from the market after the OCC and the Federal Deposit Insurance Corp. imposed tougher loan standards to limit banks' risk exposure and lower costs for consumers. Consumer advocates had criticized the costs of these loans, which often climbed into triple digits in terms of annual rates because of high upfront fees.
Mr. Erhardt said that before the guidelines, such loans were profitable for Fifth Third, which extended them to "several hundreds of thousands" of customers at a flat fee of 10%. The loans were typically for $300 and were repaid in two weeks, he said.
Terms offered by some payday loans could be similar if the loan is paid back quickly -- but many consumers are unable to come up with the money and take out new payday loans to cover old ones, ending up in what consumer advocates call a debt trap.
Mr. Bourke said banks need a simple formula that allows them to underwrite loans quickly and cheaply while making them safer for borrowers, with features such as keeping payments lower than 5% of the borrower's paycheck and allowing several months to repay. A handful of banks and lenders' groups, including Fifth Third and Regions, signed a comment letter late last year to push the CFPB to support such a format. The CFPB is currently reviewing public comments received on its proposed rules.
The Community Financial Services Association, a trade group of payday lenders, said it would welcome banks to the market. "The competition helps foster better industry practices and performance, and...increased innovation," said the group's chief operating officer, Charles Halloran.
Some credit unions continue to offer payday-alternative loans but say the new CFPB rule, which requires lenders to assess borrowers' ability to repay, might make the business line too costly.
Wright-Patt Credit Union, an Ohio-based lender with 325,000 members, has 4,000 to 5,000 short-term loans outstanding at any given time, for a total balance of $1 million to $2 million, according to Chief Executive Doug Fecher. He said the loans allow the credit union to "almost exactly break even," acceptable for a nonprofit.
"Our goal as a credit union is to help these members who run out of money and have nowhere else to turn," Mr. Fecher said. "We would just like to be cheaper for them than it would be for them to go to a payday lender."
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