Short on cash and needing to pay a bill?
Missouri residents soon could turn to their hometown banks for a quick cash advance under legislation that could allow traditional financial institutions to compete with the payday lenders that proliferate across the state.
A bill, SB254, pending before Gov. Jay Nixon would raise the fees that Missouri-based banks could charge for short-term, cash advances — a move intended to make it worth their while financially to start offering such products.
Nixon, a Democrat who has previously supported tougher regulations for the payday loan industry, has not said whether he will sign or veto the legislation.
But some consumer groups have raised concern that there is little difference between going to a bank to get a cash-advance loan on an upcoming paycheck and turning to a storefront business that advertises quick cash.
"They are short-term, very high cost and are used very frequently by borrowers," said Tom Feltner, director of financial services for the Consumer Federation of America. "They contribute to creating a cycle of debt that's commonly associated with payday loans."
Some nationally chartered banks already offer cash-advance loans at fees of around $50 for a $500 loan. They typically do so only for established customers whose accounts regularly receive direct deposits, such as paychecks. When the next paycheck is deposited, the bank automatically deducts an amount equal to the principle and fees associated with the short-term loan.
Missouri law already allows state-chartered banks to offer similar services, with fees capped at $25 or 5 percent of the loan, whichever is less. But most Missouri banks don't do so, because the fee is too low to compensate for the risk, said Bill Ratliff, executive vice president of the Missouri Bankers Association.
The legislation, which passed the House and Senate with little dissent, would allow banks to charge fees of up to $75 or 10 percent of the value of the short-term loan, whichever is less. If signed by Nixon, the bill would take effect Aug. 28.
The Missouri legislation is pivotal to making such loans available in the state because most people use locally based banks. As of the end of March, Missouri had 266 state-chartered banks with about $97 billion of assets and 26 nationally chartered banks with about $30 billion of assets, according to figures from the Missouri Division of Finance.
Ratliff said the cash-advance loans could be useful for someone who needs to make an immediate car repair but won't have enough money in his or her bank account until the next pay day.
"It's not something for people to use every day, but it's there if you need it," Ratliff said. "We think it's an alternative that's handy to have."
Although the bill would essentially allow banks to compete with payday lenders, it encountered no opposition from an industry trade group during the legislative session.
Page 2 of 2 - "We would welcome them to the market," said Randy Scherr, a lobbyist for the United Payday Lenders of Missouri.
Consumer groups also remained relatively silent about the bank payday loan provision during the legislative session, though some of them aren't too pleased about it.
"Our stance on bank payday (loans) is that a predatory product is a predatory product," no matter who offers it, said Molly Fleming-Pierre, policy director at Communities Creating Opportunity, a Kansas City nonprofit group that has pressed for restrictions on payday loans. "Folks deserve fair and reasonable interest rates."
A study released in April by the Consumer Financial Protection Bureau, a federal agency, found that the median amount borrowed by consumers through bank cash-advances was $180 for a period of 12 days, with a typical fee of $10 per $100 borrowed. The report said that would equate to an annual percentage interest rate of 304 percent.
Payday loans, by comparison, had a $350 median and 14-day duration, with a typical fee of $15 per $100 borrowed, which would translate to an annual percentage interest rate of 322 percent, according to the report.
The Federal Deposit Insurance Corp. in April proposed guidelines for banks that issue cash-advance loans while warning that can pose a financial risk to the bank while simultaneously imposing high fees on customers.
Financial institutions "often do not utilize fundamental and prudent banking practices to determine the customer's ability to repay the loan and meet other necessary financial obligations," the FDIC report said.