Regions to Lower Cost of Payday Loans
Poverty is the next big business in banking - but there are plenty of pitfalls before it becomes the next big success in banking.
The Birmingham, Ala., bank stands out for its efforts to attract long-ignored customers to the traditional banking system with alternative products, including the popular but controversial "Ready Advance."
Facing criticism from consumer groups for its payday-loan fees, Regions Financial (RF) is taking steps to make the loans cheaper for consumers.
Spokeswoman Evelyn Mitchell said Wednesday that the Birmingham, Ala., company is planning to reduce its fees and lengthen the repayment period on its Ready Advance loan, which it rolled in 2011 as a service for its customers that had been using payday lenders. Mitchell added that the planned changes are in response to customer feedback, not criticism from consumer groups.
"We have been surveying our customers and listening to them and we are in the process of making some enhancements," Mitchell said. She did not give specifics on the size of the fee reduction or adjustments to the repayment period, nor did she say when the changes would be made.
The $121 billion-asset Regions offers the loans in 16 states, including North Carolina, a state that has essentially banned payday lending. The Charlotte Observer reported this week that North Carolina Attorney General Roy Cooper is looking for a way to force Regions to stop making loans in the state, though he has not yet taken any action.
Traditional payday lenders largely exited North Carolina in 2006 after the state banking commissioner ruled that the loans, made largely through partnerships between banks and payday lenders, violated state usury laws. At issue now is whether Regions is using its out-of-state charter to get around its rate caps, Cooper told the Charlotte paper.
"We do not want North Carolina consumers subjected to payday loans," Cooper said. "Payday loans are like a consumer needing a life preserver being thrown an anvil. It gets them on a debt treadmill, oftentimes."
Noelle Talley, a spokeswoman for the North Carolina Department of Justice, said the agency has "serious concerns about the product."
"The issue has been raised to us by advocacy groups and the state banking commissioner and we will seek more information from the bank," she said.
Regions began offering its Ready Advance loan in May 2011. Consumers can only access the credit line of $50 to $500 by filing out an application online. The small-dollar line of credit is only available to Regions customers who have had a checking account with the bank for at least nine months.
Regions charges $10 for every $100 advanced, which the Center for Responsible Lending calls the standard for bank payday loans, compared to average fees of $16 per $100 lent by nonbanks.
The up-front fee is still considered high because the loans typically have to be repaid in full within 10 days, which works out to an annual percentage rate averaging between 120% and 365%, said Chris Kukla, a senior vice president at the Center for Responsible Lending.
Consumers also have the option of paying through a monthly installment plan which charges an additional 21% annual interest rate.
"This is a destructive product that buries the consumer in debt," Kukla said of payday loans.
John Owen, a senior executive at Regions, defended the Ready Advance loan product at an industry conference in June, saying the bank got into making payday loans because so many of its customers with existing checking accounts said they were also using nonbank payday lenders.
Regions says it is screening customers with Ready Advance loans to see if they qualify for other types of credit, including credit cards, according to Mitchell, its spokeswoman. The bank reports the repayment history on the loans to the credit bureaus and Mitchell said that more than half of customers have "incrementally" improved their credit scores.
"This product has the potential to help them build credit," she says.
Regions, she added, is "not a company that's offering one product and service with no opportunity to graduate to other forms of credit."