Last week, US Bank and Wells Fargo, two banks that have offered high-interest, short-term loans to their customers that closely resemble payday loans, announced they would no longer make the loans.
While advocates cheered the news because it means fewer people will be stuck in debt traps of trying to pay back these loans, it has been unclear until now just how profitable these loans are for the banks.
During a hearing held by the Senate Select Committee on Aging, this issue was raised by Senators. (Hearing Focuses on Direct Deposit Advances, are they different than payday loans?)
Senator Bill Nelson (D-FL), the Chair of the Committee, highlighted the relatively low risk involved in making these loans when the customer’s income is from Social Security. Senator Nelson remarked, “As long as there’s a Social Security Administration, that money will be coming in.”
On Wednesday, the CEO of US Bancorp (parent company of US Bank) revealed just how profitable these loans have been. The Wall Street Journal (U.S. Bancorp Profit Grows) reports that US Bank’s CEO commented that the bank earned $50 million a quarter from the loans.
Update: A July 28, 2014 article in the Cincinnati Business Courier cites the $30 million that Fifth Third Bank made from these loans in Q2, 2014 (Three reasons analyst says Fifth Third shares should jump)
While all of the banks that make these deposit advance loans have announced they will no longer make them (bowing to regulator and advocate pressure), there are several important pending issues:
1) How will customers who currently have these loans be treated? One possibility would be to lower their interest rates to 36% APR, a reasonable (if expensive) rate already in place for our active-duty military, and to also extend the loan terms so that people can pay off the loan in smaller payments and rebuild their financial security.
2) Will the banks try to offer a replacement product? Any new products could be an opportunity for banks to regain customers they are currently losing to storefront payday lenders, check-cashers, and online payday lenders. If the banks were to provide safe, affordable, alternatives, it could also go a long way towards rebuilding trust with Americans.
If you’d like to learn more about bank payday loans, please visit these CRC resources:
1) Congressional testimony: In July 2013, Annette Smith testified to the Senate Select Committee about her experience paying almost $3,000 in fees as she renewed a $500 Wells Fargo loan over the course of five years.
2) US Bank CRA exam: In June 2013, CRC authored a letter to Office of the Comptroller of the Currency during US Bank’s most recent CRA exam, citing concerns with the bank’s “Checking Account Advance.”
3) Research on Payday loans: A June 2013 report by CRC and national partners in New York, North Carolina, and Illinois, focused on the dangers of payday loans (offered by banks and storefront lenders).
4) Comment on proposed rules: In May 2013, CRC and 62 members and allies sent a letter to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, providing input on proposed rules about consumer safeguards for these types of loans.
5) Wells Fargo Shareholder meeting: In April 2013, CRC and national partners traveled to Utah to attend Wells Fargo’s annual shareholder meeting, where Annette Smith, a Wells Fargo customer, told the CEO about her bad experience with the bank’s direct deposit advance loan.
6) Wells Fargo CRA Exam: In November 2012 CRC commented on Wells Fargo’s CRA exam, highlighting the direct deposit advance. Over 2,700 people contacted the OCC, calling on the bank regulator to give Wells Fargo a “failing grade” on its CRA exam.