We have written about the competition that installment lenders are encountering not only from their fellow loan company competitors, but also potentially from the United States Postal Service.
Well, it seems that national banks are also back in the installment lending arena—or at least one. U.S. Bank announced Monday that it would be making short term, installment loans of $100 to $1000, promising instantaneous credit decisions. Interestingly, the APRs on the loans are projected to be in the 70% range when the loan customer is also a deposit customer, and in the 90% range when not. This announcement provokes several thoughts:
First, the bank loan rates are going to be far in excess of 36% APR—the holy grail of most consumer advocates and some policy makers. Why is that OK for a bank but not an installment lender? The announcement about rates validates the argument that small dollar lenders have made for years that small dollar loans simply cannot be profitably made at APRs as low as 36%.
Next, evidently there will be a different rate offered to deposit customers when the bank has access to the customer's bank account by means of direct withdrawal, a banker's right of set-off or otherwise. Is this not the very practice that has been scorned by advocates and regulators? The Bureau has consistently viewed access to a borrower's bank account allowing quick recovery, as something bad.
Third, U.S. Bank promises a very quick credit decision-making process, and reporting of credit history to credit reporting agencies. Is this not the hallmark of traditional installment lenders?
The Comptroller of the Currency, Joseph Otting, has heaped praise on the announcement by U.S. Bank, which should be fine with installment lenders. What this program and praise means to us is that business practices common in the traditional installment loan industry have been embraced by banks and endorsed by regulators as being good for borrowers, and good business practices for lenders. It will be interesting to see if banks can provide the personal relationship needed in this type of business.
So, after basically expelling banks from small dollar lending some years ago, their regulators are doing an about-face. Consumer advocates are very quiet about this new development. Time will tell if banks can provide the same level of service to their borrowers as do traditional installment lenders. It will indeed be ironic if it turns out that traditional installment lenders have been the answer for borrowers' small-loan needs after all.
Please note: This is the twenty-first blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.
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