While national organizations are suggesting that banks and credit unions offer small, low-cost loans to encourage people to use financial institutions rather than payday loan companies, Idaho banks and credit unions aren’t generally adding such services.
Both the Office of the Comptroller of the Currency and the National Credit Union Association recently advised their members to offer small-dollar loans to attract payday loan customers.
Low-income people are particularly likely to use payday loans because they are less likely to use traditional banking services. According to the Federal Deposit Insurance Corp., 7 percent of U.S. households, or about 9 million, were “unbanked” in 2015, the most recent year for which numbers are available. An additional 19.9 percent of U.S. households (24.5 million) were “underbanked,” meaning the household had a checking or savings account but also obtained financial products and services outside of the banking system, the FDIC added.
Payday loan companies typically levy higher interest rates than banks and credit unions, but also offer lower balance loans with easier credit requirements, making them more attractive to lower-income people.
In Idaho, the number of licensed payday lenders reached a high of 232 in 2008, declined slowly for several years, increased again in 2013 and 2014, and has been declining since then, according to the Idaho Department of Finance, which regulates the industry. In 2016, the most recent year for which statistics are available, 279,459 payday loans, for a total of almost $88 million, were extended. The average loan was for $314 for an average loan term of 17 days. The average finance charge reported for a $100 payday loan for a 14-day period was $19.04. Of the loans, 131,528 were renewed beyond the initial period.
Trent Wright, president and CEO of the Idaho Bankers Association, said research shows 44 percent of Americans could not cover an emergency expense that costs $400 without selling a possession or borrowing money.
“If banks and other licensed providers are not able to offer short-term credit, consumers will be forced to meet their needs through ‘informal’ sources of funds,” Wright said. Banks should be important source for his type of service, he said.
But by and large, Idaho banks and credit unions said they weren’t planning to add services for this population. U.S. Bank said it welcomed guidance from regulators but wouldn’t say whether it was planning to offer such a service, said Greg Vadala, vice president of corporate communications, in Washington, D.C. Idaho Central Credit Union doesn’t offer this service and doesn’t plan to, said Laura Smith, director of public relations. JPMorgan Chase didn’t want to comment.
Credit unions are somewhat more likely to offer such services already, said Lynn Heider, vice president of public relations for the Northwest Credit Union Association (NWCUA), which represents Idaho credit unions. Three Idaho credit unions, which she was not able to specify, have alternative payday loans, with a total of $17.9 million in outstanding payday alternative loans at the end of the quarter.
And while some financial institutions said they already offered such services, they didn’t always fall into the category of small-dollar loans. For example, while Wells Fargo offers personal loans, they typically have a minimum loan amount of $3,000, said Julie Fogerson, assistant vice president of Idaho regional communications, in Boise.
Idaho banks and credit unions aren’t alone. According to American Banker, banks in general were not making commitments in response to the OCC bulletin, which it attributed to “lingering skepticism about the business opportunities in the subprime market.” The Community Financial Services Association of America, an organization that represents the small-dollar lending industry, said that while it welcomed competition in the market, it thought banks would find such small loans “unprofitable and unsustainable, due to the high cost and risk of offering these products,” according to an opinion piece written by Dennis Shaul, CEO of the Alexandria, Virginia, organization.