U.S. Bank returns to small-dollar lending. Will others follow?

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U.S. Bancorp is introducing a new small-dollar loan for cash-strapped checking account holders — the most visible step in what could prove to be a wider renewal of bank lending to subprime consumers.

The nation’s fifth-largest retail bank began offering the Simple Loan on Monday, nearly five years after discontinuing an earlier product that critics compared to a high-cost payday loan.

The revamped product seems unlikely to draw as much flak from consumer advocates, though it is expensive in comparison with various options that are available to borrowers with good credit scores.

Customers will pay $12 to $15 for each $100 they borrow, up to a maximum of $1,000, according to U.S. Bank. The loans come with a three-month repayment schedule, and they feature annual percentage rates of 70% to 88%.

The loans also include certain borrower protections. Customers will not be allowed to take loans that result in monthly payments equal to more than 5% of their gross monthly income, and they will have to wait 30 days between paying off one loan and applying for another.

U.S. Bank also states clearly on its website that the loan is a high-cost product.

“We want to be very transparent with consumers that there might be other options that are a better solution for them,” said Lynn Heitman, executive vice president of consumer banking sales and support at the Minneapolis bank.

U.S. Bank’s announcement comes at a time when its primary federal regulator, the Office of the Comptroller of the Currency, has been encouraging banks to serve a market segment dominated by firms that charge triple-digit annual percentage rates.

In October 2017, the OCC rescinded guidance, issued four years earlier, that had forced U.S. Bank and other depositories to stop offering so-called deposit advance loans. Those products generally carried triple-digit APRs, and they typically required full repayment within a month or so.

Then in May, Comptroller Joseph Otting encouraged banks to start offering small loans to customers with credit scores of 680 or below — further evidence that regulatory climate had changed.

During an interview Monday, Heitman downplayed the significance of the change in tone from Washington, saying that the product U.S. Bank rolled out on Monday is almost entirely the same as the product it has been testing, in consultation with its regulators, since 2016.

But Nick Bourke, director of the consumer finance project at the Pew Charitable Trusts, said that banks generally will not make hefty investments in product development without clear signals that their regulators approve of where they are heading.

“Regulatory clarity of some sort is essential,” he said. “The OCC has clarified and moderated its expectations.”

The Pew Charitable Trusts has championed the idea that regulations should bar consumers from taking loans that require payments of more than 5% of their monthly income, and Bourke offered praise for U.S. Bank’s latest product.

“This is a positive development that could mark a paradigm shift in financial inclusion, because it shows banks are beginning to serve customers they’ve ignored for too long,” he said. “If other banks do so, millions of people could save billions of dollars per year.”

To apply for U.S. Bank’s new credit product, consumers must have a checking account at U.S. Bank, which has $453 billion of assets. Heitman said that the product will be available to almost all such customers, and will be offered through online and mobile banking channels.

Customers who elect to have their payments automatically deducted from their checking accounts each month will pay a lower fee than those who choose to make payments manually, according to the bank. Those who repay early will owe the same amount that they would have paid over the full three-month term.

The entire lending process — starting with the borrower’s application and ending with the funding of the loan — will happen digitally. Borrowers will receive their money within minutes, according to U.S. Bank.

For customers with “a short-term cash need, the immediate accessibility of the funds is a critical component to them,” Heitman said.

It is unclear how much impact the new loan product will have on the company’s bottom line. Back in 2014, the firm stated that its deposit advance product had early approximately $50 million per quarter before being discontinued.

Late last year, Chairman and CEO Andy Cecere raised the possibility of returning to the market, but also warned, “If it comes back, it would probably be at a different fee level and probably not the same size as what you saw historically.”

Some analysts argue that banks have been reluctant to offer credit to subprime consumers for fear of cannibalizing the substantial revenue they collect from overdraft fees.

When asked about that issue on Monday, Heitman said, “I’m not concerned about that at all.”

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Small-dollar lending Payday lending Subprime lending Deposit advances Compliance U.S. Bancorp OCC