Banks Eying a Return to Small-Dollar Installment Loans?

U.S. Bank, the largest regional bank in the United States, announced yesterday that it would begin providing small-dollar loans between $100 and $1,000 to its customers, making it the first national bank to offer such loan products.

It is called “Simple Loan.” According to a statement, checking account customers at U.S. Bank will be able to borrow in $100 increments, up to $1,000, over a three month period. The loan comes with a financial service fee between $12 and $15, making the annual percentage rate between 70% and 80%.

The entire process will be done digitally and online, “from application to underwriting to booking to funding for approved customers. It will be available only through online banking and the bank’s mobile app.”

This new small-dollar loan product follows a bulletin by the Office of the Comptroller of the Currency (OCC) issued last May titled, “Core Lending Principles for Short-Term, Small-Dollar Installment Lending” that reversed a 2013 Obama administration directive that instructed banks to avoid such loans over concerns that customers would be unable to repay them.

At the time, Comptroller of the Currency Joseph Otting noted that “millions of consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000 to make ends meet. Consumers should have more choices that are safe and affordable, and banks should be part of that solution.”

Despite the federal policy, many banks had already withdrawn from the small-dollar loan market, leaving consumers to turn to alternative sources of financing when faced with a short-term financial need. “If banks truly could serve the small-dollar loan customers profitably, they would,” says Dennis Shaul, chief executive of the Community Financial Services Association of America (CFSA).  “Instead, they have in large part abandoned certain communities, leaving them underbanked or unbanked and writing them off as poor prospects.”

U.S. Bank’s new “Simple Loan” is not the first time that traditional lending institutions have dabbled in short-term, small-dollar products. In 2009, the FDIC tested a pilot program to explore the viability of banks offering small-dollar loan products with a 36% interest cap. Banks largely found these products unprofitable, which made them hesitant to become fully vested in this venture.

Still, there is a definitive need for short-term, small-dollar loans. According to a 2015 study, 7.0% of households were unbanked, and an additional 19.9% of households were underbanked, meaning that the household had an account at an insured institution but also obtained financial services and products outside of the banking system within the past 12 months.