Bring Back ODP Loans!

Good Grief. Read this excerpt from a Bloomberg article published last month (“Banks May Use Payday-Style Loans to Replace Lost Overdraft Fees”, Jeff Plungis, February 23, 2010):

“U.S. banks may expand their short- term lending at interest rates of 120 percent or more as they seek to replace more than $15 billion in lost revenue because of regulations limiting overdraft fees.

“The smarter banks are trying to resell overdraft protection to consumers as a different product,” said Elizabeth Rowe, group director of banking advisory services at Mercator Advisory Group in Maynard, Massachusetts.

Banks including Cincinnati-based Fifth Third Bancorp, and U.S. Bancorp, based in Minneapolis, are already making such loans, usually from $100 to $500, at annual rates of 120 percent if repaid in 30 days. They’re known as “checking advance products.” That puts them in competition with so-called payday loan stores, which make loans with similar terms to customers who generally don’t have credit cards to bridge the gap until the check comes, according to Rowe, whose firm advises banks.

The banks don’t call the advances payday loans because it’s a “very tarnished, negative brand,” said Rowe, who estimates U.S. banks may lose from $15 billion to $20 billion in revenue when Federal Reserve rules take effect July 1. The rules will prohibit banks from charging overdraft fees at automated teller machines or on debit cards unless a customer has agreed to pay for exceeding account balances.

For consumers, getting a short-term, high-interest loan from a bank might be worse than going to a payday store, said Lauren Saunders, managing attorney with the National Consumer Law Center in Washington. A bank has direct access to consumer accounts, meaning its loans will be paid off first, ahead of food, housing or utilities, she said.”

Am I the only one on the planet that remembers Overdraft Protection Lines of Credit? We called them ODP for short. These “loans” (yes I said loans) were small revolving lines of credit that were attached to a customer’s checking account (essentially, increasing the available deposit balance by the available credit line). Borrowers were charge interest on ODP balances using the same calculation as credit cards. Checks went through, customers were not embarrassed by a returned item, we made a little interest income – everybody wins and life goes on.

So what happened? Well, the Number Crunchers analyzed the whole loan & collection process and concluded that to pay a loan officer to underwrite tiny open-end lines of credit was not cost-effective and, oh by the way, banks can make a lot more money by simply charging the customer a $20-35 fee for clearing the transaction. (which still seems like a loan to me but that’s a discussion for another day). Plus, since financial institutions really don’t want to carry loan portfolios anymore (see March 1st posting), this is another great way to generate fee income under the cloak of customer service and benefit.

So now that new regulations are coming into effect that will restrict this kind of practice, are we really headed down the path of payday lenders and provide short-term loans at exorbitant interest rates all under the cloak of customer service and benefit.

Why reinvent the wheel here and just bring back revolving lines of credit attached to the deposit accounts? Oh wait…. that’s right…. that’s too old-school now…