CINCINNATI — When it launched its Early Access loan program in 2008, Fifth Third Bank focused its marketing efforts on “impulse” borrowers and “a database of customers that we know currently or have used payday lenders,” according to trial testimony and evidence presented to a federal jury this week.
That jury is being asked to decide whether Fifth Third overcharged more than 400,000 customers who are now seeking $440 million from the bank in a class-action lawsuit. The verdict will rest on a mundane contract question: Did the bank’s government-mandated APR disclosure require it to cap the cost of borrowing at an annual interest rate of 120%?
But more interesting than that is the business strategy that Fifth Third developed for the 2008 launch.
“We developed this formula” to determine eligibility for the program, said Mark Erhardt, a retired Fifth Third senior vice president who testified Thursday. “If you were eligible based on that formula, then we’d put a message on your internet banking screen that said, ‘Hey, we have a new product.’”
Erhardt said the bank was looking for ways to round out its product line and was keenly aware of “FDIC reports about consumers that really were not getting their needs met from traditional bank products, which is why they were going to non-bank providers, check cashers, people like that. So, we actually took that information very seriously.”
A 16-page executive summary of the program showed the bank was also trying to reduce its “dependence on overdraft revenue” with a loan that would help customers avoid bad-check charges “while simultaneously helping us grow our fee revenue.”
For a 10% transaction fee, Early Access offered existing Fifth Third customers the ability to borrow up to $500 — or 50% of their monthly direct deposits — in short-term loans paid off by their next direct deposit. The bank projected Fifth Third would generate $2 million a month with an annual growth rate of 25%, according to the June 2018 document. When the bank launched three months later, it joined Wells Fargo and U.S. Bank as the only large banks to have a competitive offering against payday lenders.
“It actually took a fair amount of sophisticated technology to build this product,” Erhardt told jurors. “The reason why we were able to get into this business is we had technology that was flexible and we had really good technology people to build it.”
The bank blew away its revenue projections, based on testimony from Arthur Olsen, a Seattle-based data consultant hired by plaintiff attorneys to calculate potential damage awards. Olsen said the bank collected $773.4 million in fees from the 477,074 people who joined the early access program prior to May 2013 and paid more than 120% in effective annual interest because their loans were paid off in an average of 10.19 days.
Which brings us back to that mundane contract question. If all of those 477,074 people held their loans for a month, their annual percentage rate would have been the same as the 120% rate Fifth Third quoted in its loan agreements. But because their next deposit paid the loan off early, they carried an actual APR of 332%, on average, Olsen testified. Thus, they became part of a class action lawsuit that Fifth Third may have avoided if paid more attention to a concern raised in 2009 by another bank executive.
“You and I need to decide if we want to keep the program as-is, or if we need to make a change,” former Vice President Bruce Howard wrote to Erhardt in March 2009, according to an email shown to the jury. “We could have some exposure if the Fed begins to dig into the program and find that some customers don’t get the full 35-day term because we call the loan, but I think that the exposure may shine on our 120% APR disclosure (too low) rather than whether or not we’re doing something wrong.”
Fifth Third declined to comment on its ongoing trial or the details presented to jurors. But it did provide a statement about the case:
“We believe our defense is compelling and we are vigorously defending our case. Our focus was — and has always been — on doing the right thing for our customers and putting them at the center of all we do.”
