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In June, when the FDIC issued its final Affordable Small-Dollar Loan Guidelines and FDIC Chairman Sheila Bair was pressing commercial banks to compete with payday lenders for the "Mini Me" loan biz, even banks in states like North Carolina, which kicked out the bottom feeders, were rolling their eyeballs in disdain at the prospect of rushing in to fill the breach. Among other problems, the Guidelines "encourage" banks to cap the APR at 36 percent.
"The $64 question is what interest rate or credit cost do you need to give the lender an incentive to make these small loans, based on their risk and size," said N.C. Commissioner of Banks Joe Smith.
"My impression of the banks' perspective is that these are slightly to very much riskier than most loans, so their question is if they charge a rate that gets them a return, will they be vilified? Or if they charge a rate everyone thinks is reasonable, how much will they lose?"
[Lets briefly take a detour and touch on the issue of the "annual percentage rate" of payday loans, since a post I did last March that mentioned, in passing, that typical payday loan APRs were in the neighborhood of 390% drew the charge from a junior associate at a law firm in some backwater burg that I was being "ridiculous" to use an annual percentage rate in describing the yield on a payday loan, inasmuch as most payday lenders charged a flat fee (say, $15 per $100 borrowed) and most payday loans only lasted a week or two. Even if my critic's contention as to average loan maturity was accurate (and it was not, since most payday loans are rolled over repeatedly), he "overlooked" the requirements of the Truth In Lending Act, which requires the finance charge to be disclosed in the form of an APR, so that (as the FTC explains in its consumer alert entitled "Payday Loans = Costly Cash") the consumer may "[c]ompare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost." Therefore, like the FTC, the FDIC and the rest of the thinking man's (and woman's) bar, we will use annual percentage rates when discussing yields on payday loans, "ridiculous" or not.]
The North Carolina banks banks profiled in the linked article didn't believe that there was enough bang for the buck to justify dipping their toes in the shallow water. Even the lone credit union that offered a payday loan-like product wasn't making any money on it because it was barred by state law from charging more than an 18% APR and it was actually requiring the loan to be paid back in 90 days. If it had only rolled the loan over (and over and over) and neglected to comply with the usury laws, it might, like Madonna, have been able to "get into the groove" and make some real payday lender-like money.
Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which, according to another article, represents about 60 percent of the payday loan industry, said the 36% annual percentage rate cap was a non-starter for commercial banks.
"There's an effort to cap loans at 36 percent annual rate, which the FDIC guidelines suggest. How that works into two- week loans is $1.38 per $100," she says. "I know payday lenders can't make money on that, so banks couldn't possibly either."
As an alternative, a bank could do it the Wells Fargo way.
Wells Fargo & Co. started a direct-deposit cash advance program in 1994, intended as a short-term solution for small emergencies. It's available for all customers with a direct deposit of $100 or more a month, allowing them to borrow up to $500. The bank charges $2 for every $20 borrowed, which can translate into interest rates comparable to those of payday lenders.
Kathy Bolner, Wells Fargo community banking president for Central Texas, says despite the high cost, the bank has an advantage over payday lenders.
"Direct-deposit advance is an efficient way for them to have access to funds in an emergency situation," Bolner says. "But we spend a lot of time visiting with them about the full financial picture as opposed to just reacting to an emergency."
Of course, Wells Fargo's a national bank, not subject to the FDIC guidelines and their "suggested" cap. Wells Fargo's way would not be the way for a state chartered, non-FRB-member bank.
It's too soon to be certain, but early indications appear to be that this effort of Ms. Bair's is being met by most banks with a big, fat yawn.
