Which TARP Recipient Has the Best Payday Loan Product?
If we had a vibrant economy where delinquincies were receding and employment was roaring back (NOT!), it would make sense that banks would take on a little more risk. The evidence is clear, though. We have recovery in share prices, but the budgets of households are not back where they were. Credit card charge-offs are up, and unemployment is still high.
That is why it seems odd that some of our largest banks have decided to offer a new payday-loan product. US Bank, Wells Fargo, and Fifth Third are three banks that are rolling out short-term loan programs where APRs exceed 120 percent.
Did I mention that each of these banks was given a huge TARP investment? True, US Bank and Wells have already repaid their TARP funds, and Fifth Third indicates that it intends to do the same in the next quarter.
I think the appearance of these new products reveals how this credit crisis is hurting middle America. Consumers don’t want to use loan products like payday loan-priced advances on their next paycheck. They would prefer to use credit cards (interest rates of as much as 29 percent) or a line of credit (perhaps 12 percent.) These new payday products cost at least 120 percent. People aren’t dumb. They are taking this bad deal only because banks aren’t offering something more reasonable.
Let’s review the new payday products.
Fifth Third’s Access Now: “when you need money but you don’t have time to wait.” The cost is simple – $1 for every $10 advanced. Funds are repaid with the next direct deposit. If your direct deposit is 30 days off, then your interest rate comes to about 121 percent. If you borrow in the middle of the month, or if you have a bi-monthly direct deposit, then it amounts to 267 percent.
Wells Fargo Direct Deposit Advance Service: “Alternative sources you could consider include: a credit card cash advance; personal loans; home equity line of credit; using existing savings; or borrowing from a relative.” Hey, why not mention loan shark or your neighborhood hard money man? The cost is $2 for every $20 borrowed. Like Fifth Third, this product is repaid with your next direct deposit. There are some additional “promises” in the Wells product. For example, if you don’t have a direct deposit in the next 30 days, then Wells adds a $35 fee to your principal balance. Wells gives you 35 days to make your payment, so the APR could be as little as 104 percent.
Wells is always talking about the need to sell multiple products to each customer. Looks like they’ve just added to that vision.
US Bank Checking Account Advance. “A line of credit from your own future deposit.” $2 for every $20, repaid from next eligible deposit. Loan term is up to 35 days. US Bank says it amounts to a loan of up to 120 percent APR. That seems like some fuzzy math. It could be far more, depending upon how soon your next direct deposit occurs.
The Broader Story
More consumers are having a hard time getting loans, credit cards, small business loans, and consumer lines of credit. These new payday-style services are coming in their place. Remember – these products are not going to people on the fringe of the financial system.
It is harder to get "good credit" now. In that situation, there is demand for these bank payday products. That is a shame, because this is high-cost credit.
this chart is from CFSI.
The structure of these advance products mimic some of the features that I pilloried in my comments about NetSpend and their prepaid debit cards.
The main difference with these advance loans, though, it that they are going to go to a more well-off set of consumers. These are people with checking accounts. Right off the bat, that represents the encroachment of high-cost credit into a more well-off demographic than traditional payday lending.
Those prepaid cards go to the unbanked. I have spent some time talking about the unbanked. The FDIC says that between 9 and 13 percent of American households have no transaction account. The Center for Financial Services innovation suggest that another 40 million households are underbanked. It might be hard to believe, but only about 51 percent of American households have access to the standard set of services that we would consider to make up the idea of regular banking.
Those consumers are largely poor. The Progressive Policy Institute says that four of every five non-banked households makes less than $25,000 per year.
These products are going to go to a better sort of consumer. It’s a shame. Banks are turning their backs on tax payers. Banks are ignoring the people who got them out from under the burden of their own mistakes.
Filed under: Community Reinvestment Act,policy,TARP,unbanked,urban affairs | No Tag
The New Race to the Bottom | Bank Talk
March 23, 2010
[...] years ago. Three big banks (Fifth Third, US Bank, and Wells Fargo) have gotten into this game with short-term loans. There is a uniform 10 percent fee on all of their products. The loan terms are generally about [...]
nicksparagis
July 17, 2011
Good article. The Wells Fargo product is around $7.50 per $100 (not 10%). Banks have a huge advantage over payday lenders offering a payday loan. Financial literacy is at the heart of the issue. People know that this product is expensive, but they use it anyway. I get the feeling they're comfortable having their backs up against the wall.
The truth is that banks offering payday loans is bringing the cost down for borrowers. That's a good thing. What I don't like is the hypocrisy. They should let the markets decide if payday loans are expensive. Instead of rate ceilings, they should only allow lenders to collect what's on the contract if they choose to give out a high risk loan.
sdoggie
July 18, 2011
It was higher when I wrote that. You are correct that it is now $7.50.
I still think it is the wrong direction for banks to be offering this product.
sdoggie
July 18, 2011
Here is another thing to ponder: do the payday lenders resent what the banks are doing here? Do they wish that they could tap TARP funds to offer these kind of products, too?
nicksparagis
July 18, 2011
I'm not saying a payday loan is a smart financial move, but you have to back up your statement when you say wrong, why? The bank (or payday lender) are lending money and charging an amount where they can make money.
It bothers me that people use payday loans and I wish they didn't. It would bother me a lot more if we took this decision making ability away from them. I'm not an advocate of making decisions for people. It make them dumb.
People will not pay $5 for an apple, but they'll pay $50 for money they have to pay back in two weeks. This is the main problem. How do you teach people discipline? You don't teach them discipline by taking it away. They learn by taking responsibility for their decisions in life.
sdoggie
July 20, 2011
There is always a fine line to that question. We can agree that it is a stupid choice for the consumer. On the other side of the equation, the lender is pricing the product based on their ability to find consumers that will pay for it. So the market is clearing at a balance between supply and demand and there is some logic to leave it alone.
That said, there are many kinds of transactions that our society puts the brakes on, even if both parties want to make the deal. Usually the situation has to put third parties at risk. This is how we as society respond to some transactions that involve some drugs, unlicensed fire arms, etc. There are also special classes that get protection. Minors and seniors are a good example. Would you take away the protections that are given to seniors against phone fraud?
We all lose from the costs associated with these kind of transactions. It means higher insurance rates and higher taxes. Payday loans are of that ilk – because impoverished people inevitably end up having to throw themselves at the mercy of the state.
How do you like that – an anti-tax argument for prohibiting payday lending!
nicksparagis
July 20, 2011
I like your statement about putting third parties at risk. There is a ripple effect. One of the more provocative examples is requiring insurance coverage. It's common knowledge that the people that have insurance have to cover the losses from non-paying patients.
It's a reality that people need money. http://on.wsj.com/k0wsVh This WSJ reports that (in a survey) half of all Americans either probably or do not have access to $2000. We've been talking about negative savings for years, but how do you help these people out?
Again, payday loans look really bad on the surface. One upside (unlike credit cards) is that they do not affect your credit. You can make the argument that credit card do more harm to society b/c they can make all the major purchases in a person's life (house, cars, appliances) more expensive.
I guess my point is how can businesses help people and make money? Is regulation helping our hurting?
sdoggie
July 21, 2011
I have seen the data on assets. There are very many people out there that would be glad to have $2,000 in cash or another liquid instrument. They don\’t. It is true that payday lenders will give them cash, as will auto-title lenders and perhaps a few hard money specialists.
I think the lesson of the last few years is that we are too leveraged. There is too much credit out there. It might be paternalistic to say it, but there are some people that should not be borrowing money. They don\’t have the money today and they aren\’t going to have any more money tomorrow. The lenders do make money and I imagine that the curb on their growth is less about diminishing margins and more about a finite set of customers to draw upon. Payday lenders need new blood.
sdoggie
July 21, 2011
With regard to government regulations, I do not think that the problem lies there.
People talk about the difficulty in getting a mortgage these days. An example – my tennis pro hasn\’t been able to close on his house. The bank has put back the date twice. He is stuck in a hotel. He thinks it is about government regulation.
The real factor is that the government is withdrawing from the market. If there was more government presence, then he would have closed. As it is, the lender is afraid that his loan won\’t meet the delivery requirements for Fannie and Freddie. They don\’t want to be stuck with a mortgage loan on their books. Short of the GSEs, there aren\’t many buyers out there.
If we are talking about payday, then it is a different dynamic. The regulation has been on the state level. States rarely eliminate payday. They just put a cap on interest rates. The payday people won\’t make a loan at 36 percent.
nicksparagis
July 21, 2011
Does everybody wish they could get TARP money?
nicksparagis
July 21, 2011
You made a good comment, but I don't see it posted today. You said that "There is too much credit out there. It might be paternalistic to say it, but there are some people that should not be borrowing money."
The problem I have with that comment is when a rich person files bankruptcy, it's a smart move. When a working class poor person files BK, they should never have gotten the mortgage/credit card/car loan, in the first place. Not to get Ayn Rand on you, but it's not right to decide who can and can not get a loan. You can't save people from themselves.
sdoggie
July 22, 2011
For better or worse, underwriting has to go on ability to repay. If we can take the leap of defining a rich person as someone who has either a high income or a reasonably large amount of liquid assets, then banks can't be faulted for providing them with credit. Many of today's foreclosures are the product of job loss and/or health problems. Let's also be honest that what banks should be doing – underwriting on ability to repay – is not something that have always done. A few years ago, in the early stages of the foreclosure crisis, defaults were more often a product of 2-28 and exotic loans. Lenders were making loans without documentation or with little regard for ability to repay. If the banks do bother to determine who is rich, then it only makes sense that there is more lending to those folks. This is not to say that loans shouldn't be made to the non-rich, but only to say that loans should be made to the non-rich that are consistent with their ability to repay. We can't know who will go in to bankruptcy with certainty but ability-to-repay is at least an empirical method.
sdoggie
July 22, 2011
I'd also like to say that we are better off with bankruptcy as an option than we would be without bankruptcy. Look at Japan. The cultural and policy framework in Japan means that bankruptcy is very difficult. Shame is a powerful element there. The government has a strong hand in the corporate sector. For the last two decades, Japan has been supporting its industries with tax concessions, a general lack of public disclosure, and intertwined relationships between government and corporate leadership. The last two decades are referred to as the lost years, because these companies have ceased to really prosper. They are struggling with deflation. They had a crisis two decades ago and they still haven't worked through it. Witness the lack of accountability with the nuclear power disaster after the tsunami. Even now, the government takes the word of Tokyo Power that the problems have been corrected. Then it turns out they haven't done any tests.
The country needs bankruptcy. Check out the data on bankruptcies. The big ones have been subsidiaries of Lehman Brothers! They need to be gone with those companies so that capital can be repurposed. As it is know, too much of new investment only serves to service debt.