New short-term loan product at U.S. Bank draws scrutiny

U.S. Bank's new Simple Loan is not complicated, but its ramifications are. Just three months after its introduction, the first-of-its-kind short-term lending product is attracting scrutiny from consumer advocates and competitors.

Simple Loan gives millions of U.S. Bank customers who meet certain criteria quick access to as much as $1,000. Borrowers pay off those loans in three monthly installments with interest charges of $12 per $100 or $15 per $100. The numbers compute to annualized interest rates of 70 or 88 percent.

Consumer advocates express mixed feelings about the new loans because of the high interest rates.

But some in the advocacy and financial communities see Simple Loan as a less-costly alternative to payday loans which, while legal, often trap cash-strapped customers in debt cycles that produce triple-digit interest. Giving borrowers with unanticipated expenses another choice has become even more important as the U.S. Consumer Financial Protection Bureau considers repeal of Obama-era rules controlling payday lenders.

U.S. Bank officials said high interest rates are the only way to make a widely accessible short-term loan program sustainable. Officials also said they clearly disclose the high rates to borrowers and explain cheaper alternatives, such as credit cards or lines of credit.

"Our goal is to help customers succeed in bridging a gap in an emergency," said Lynn Heitman, U.S. Bank's vice president for consumer banking. "We did not set out to set a standard for the [banking] industry."

The U.S. Bank product is "not a way of trapping people," said Tracy Fischman, executive director of Prepare + Prosper, a St. Paul-based group that helps low-income people with taxes, financial counseling and savings strategies. "We do have concerns about the price. But it's a lot better than payday lenders, where loans can have 300 percent interest rates."

Rebecca Borne, senior policy counsel at the Center for Responsible Lending (CRL), does not believe the Simple Loan model will curtail what she considers predatory practices by payday lenders. Borne supports interest-rate caps. Fifteen states and the District of Columbia have caps, usually 36 percent or less. CRL supports a national cap of 36 percent. That is the cap Congress set on loans to military service members and their families.

"The U.S. Bank product serves to legitimize very high interest rates both for bank products and nonbank products," Borne said.

Short-term lending is profitable. A 2016 study by the Pew Charitable Trust found that 12 million Americans take out payday loans each year, paying $9 billion in fees. Interest charges average 391 percent, Pew found.

A market exists for alternatives, said Andrew Winton, chairman of the Finance Department at the University of Minnesota's Carlson School of Management. U.S. Bank risks hits to its reputation as critics call Simple Loan interest rates predatory, Winton noted. But the bank's disclosure to customers about interest rates, its effort to make sure borrowers can repay, and its discussion of cheaper choices suggest an effort to keep customers out of debt cycles. "If U.S. Bank's program avoids the worst outcomes," Winton said, "I'm sure a number of banks will get into this."

Simple Loan is designed to reach as many customers as possible, while earning enough for the bank to keep it going on a large scale, Heitman said. Profitability comes from the digital nature of the program in which online and smartphone transactions cut down or eliminate personnel expenses.

Introduced in August, Simple Loan is available to customers over 18 who have had U.S. Bank checking accounts for at least six months, who have made at least three months of recurring deposits and who have no delinquent accounts. Applicants are subject to credit and debt checks, Heitman said.

The massive scale of the Simple Loan program sets it apart from programs such as Financial Access in Reach (FAIR), an initiative run by Prepare + Prosper in cooperation with Sunrise Banks. That nascent program seeks to teach money management to low-income people so they can avoid crisis borrowing. It hopes to enroll 100 people by January.

Another Sunrise initiative, called True Connect, partners with employers whose workers can borrow $1,000 to $3,000 in minutes with no credit check and pay the loan back with a year's worth of automatic payroll deductions at a flat interest rate of 24.99 percent.

"We have some very large employers coming on line," Sunrise CEO David Reiling said. True Connect could soon rival Simple Loan in scale, he added.

Reiling supports U.S. Bank's entry into the small-dollar loan space. The Simple Loan annual percentage rate is high, he said, but across the three-month payback period, $12 per $100 is affordable for borrowers and might make money for lenders if transactions can be kept digital. "It's got be electronic," Reiling said. "One personal transaction is going to cost hundreds of dollars [in personnel expenses]."

U.S. Bank's assessment of borrowers' ability to repay distinguishes Simple Loan. The Consumer Financial Protection Bureau plans to reconsider an Obama-era rule that forces payday lenders to determine ability to repay before approving loans. With Donald Trump, a Republican, in the White House, many who follow regulatory affairs think the rule will be repealed or not enforced.

Another distinction is how loans are repaid. Payday loans are essentially advances on pay that are supposed to be repaid in a lump sum by the next payday. If an individual can't do that, he or she must reborrow. This can lead to people paying interest and fees on 12 to 15 separate loans to pay off the initial principle.

U.S. Bank and other national banks once offered "advance deposit" of future pay to customers with single payments of principle that frequently forced reborrowing. Those programs often generated triple-digit interest rates, the Center for Responsible Lending's Borne said. The Office of the Comptroller of the Currency issued rules in 2013 that caused them to shut down.

In contrast, Simple Loan requires three equal monthly installments and imposes a 30-day waiting period before customers can borrow from the program again, Heitman said. "We don't want to make a loan that they can't repay," she explained.

The bank does not withdraw money if funds are insufficient to cover a loan payment, Heitman said. So borrowers do not suffer overdraft fees. But those who miss payments are reported to credit bureaus and turned over to the bank's collection department if they do not pay up within 24 days.

Heitman would not say what the Simple Loan default rate was. "It is more than standard lending," she said. "But you are broadening the base [of who gets a loan]. So you expect the loss rate to be higher."

Dennis Shaul, CEO of the Community Financial Services Association of America, a payday lending trade group, said competition from banks will be "a win for consumer choice" and help innovation. But Shaul also made a point that concerns consumer advocates. He said "all lenders, including new entrants, should operate on a level playing field where regulators impose the same laws and regulations to each ..."

Interest rates payday lenders charge are governed by the laws of each state where they operate. National banks are governed by federal regulations that set no limits on interest charges except in the case of members of the military and their families. If other banks follow U.S. Bank's lead, Center for Responsible Lending's Borne fears, it will give the payday lenders' lobby ammunition to lift state interest caps.

"There is," she said, "not a lot of evidence of competition bringing rates down in high-cost lending."

Jim Spencer • 202-662-7432