Is now the time for banks to resume small dollar lending?
WASHINGTON – Despite regulatory calls for banks to provide small dollar loans to those hit by the coronavirus pandemic, debate rages over whether financial institutions should compete for less traditional lenders.
Last week the Federal Reserve, Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration issued instructions Supervised institutions are “well suited to cover the credit needs of customers affected by the current COVID-19 emergency”. They could offer small dollar loans to help consumers and small businesses meet cash flow needs, the agencies said.
However, some experts say the statement lacked important details that banks had requested from regulators in order to feel safe when competing with payday lenders, such as reasonable credit terms, interest rate caps, and fee structures. Consumer advocates, meanwhile, have raised concerns that regulators are advocating expensive loans that have traditionally made borrowers’ financial health worse.
“Every time I talk to banks about small dollar lending, they say it takes more formal and explicit guidance for banks to move permanently,” said Diego Zuluaga, a political analyst at the Cato Institute. “If I’m a bank but don’t know the parameters, I don’t know [last week’s guidance] will make a huge difference. ”
Still, industry representatives welcomed the message validating banks as a responsible resource for small dollar lending.
“I hate to say that, but I think what we are going through now with the crisis has opened the eyes of even consumer groups,” said Richard Hunt, President and CEO of the Association of Consumer Banks.
Simple in design
The regulatory guidelines aimed to highlight the “role that responsibly offered small dollar loans can play in meeting their borrowing needs due to temporary cash flow imbalances, unexpected expenses, or loss of income during times of economic stress.”
The bulletin builds on more general guidance from early March when regulators instructed banks to work with clients affected by the pandemic. However, the statement was also another sign of the complete departure by regulators from their earlier stance during the Obama administration when they turned against banks offering payday loan-like products. The FDIC and OCC effectively banned advance deposit products in 2013. The OCC has since lifted its ban and the industry has asked the FDIC to do the same. In 2018, the OCC issued a policy statement that encourages banks and savings banks to meet customers’ short-term credit needs.
Last week’s guidance did not limit the circumstances in which banks could be considered suitable small-dollar lenders to crises.
“The agencies also recognize that responsible small dollar lending can benefit financial institution customers during normalized times when there are unexpected expenses or temporary loss of income,” they said.
Regulators say last week’s guidance was simple and non-binding, with speed and cross-agency collaboration a top priority to encourage banks to help pandemic-hit consumers with small dollar loans as soon as possible. For months, officials have been signaling that the agencies are planning more detailed guidelines on small dollar loans.
An FDIC spokesman argued that the sooner banks offer small dollar loan products and give customers more choices in financial methods to help weather the economic impact of the pandemic – the better. An OCC spokesperson agreed that “banks … are well positioned to meet this need without the harmful practices often associated with other sources of credit”.
The guidelines also attempted to address concerns about the risk of cyclical indebtedness in small dollar loans by encouraging institutions to consider resolution strategies that would allow the borrower to repay the principal of the loan while reducing the need to borrow again.
But small dollar lending has long been in the dark for US banks. Not only were there questions about profit potential, banks were often concerned about the regulatory implications.
Consumer advocates say the regulator’s statement is setting the wrong tone.
“Banks want to please their customers in general – they want to be responsible lenders,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. But the high short-term cost of small dollar loans can “take away the financially distressed person who is entangled in expensive debt, and leave them worse off.”
She added that “even in the best of times, the data shows that these loans will not help the financially needy people they are targeting.”
However, Hunt said banks that had previously offered small loans received positive feedback on the products from consumers.
“I wish this product didn’t have to exist,” said Hunt. “But the fact is, once you step out of the government’s ivory towers, you’ll find out that America is suffering and that America needs quick access to these kinds of things when it comes to medical bills, the grocery store, or car repairs.”
The ability of insolvent Americans to meet unexpected expenses was on the radar of policymakers long before the coronavirus crisis.
A 2018 Fed survey of the economic health of U.S. households found that 61% of respondents could cover a hypothetical, unexpected $ 400 expense with cash, savings, or an instant credit card. Of the remaining respondents with insufficient funds, 16% said they had a credit card balance with them, while 2% said they were using a payday loan, deposit advance, or overdraft protection. Get an instant loans like Greendayonline
Since 2018, both auditor Joseph Otting and FDIC chair Jelena McWilliams have shown an interest in encouraging banks to return to small dollar lending.
If small dollar lending is “banked, we can regulate it,” McWilliams said in 2018, shortly after the FDIC began soliciting comments on how best to encourage small-dollar bank lending. “And we are able to work with the banks to ensure that consumer protection protocols are in place and compliant while ensuring that consumer needs are met.”
After the OCC overturned its 2013 guidelines, Otting told reporters that small dollar loans were “a tool to help people get back into mainstream banking and withdraw them from expensive financial services products like check cashing and payday loans.”
Since then, a few banks have cautiously entered the space. Above all, the US Bank offers Simple Loan, with which customers can borrow up to $ 1,000 in $ 100 increments with an annual percentage of around 36%. Other banks have recently started offering small dollar products directly in response to COVID-19.
The need for the right guard rails
However, consumer advocacy groups have argued that without proper guard rails, such products can only worsen customers’ financial prospects.
“The guide … lacked the most important piece of responsible small dollar credit, and that ensures that the price is reasonable, affordable, and that people can afford to pay back the loan,” said Lauren Saunders, assistant director of the National Consumer Legal Center.
Of particular concern to proponents was a line from the recent guideline that listed support for “appropriately structured lump sum loans” which they believe could open the door to some type of payment scheme used by payday lenders to collect interest, late fees and other penalties.
“It is disturbing to see them emphasize the possibility of single-use loans – that is, balloon loans and payday loans, which are the last thing people need right now,” said Borné.
Some proponents also fear that regulators may be taking advantage of the crisis to accelerate small dollar lending reform.
“It is all the more important today, given the immediate aftermath of this crisis, to ensure that small dollar loans are affordable,” Saunders said. “And the last thing we need is to use this crisis as an excuse to give the green light to expensive small loans.”
At the same time, many analysts say that banks, with their access to cheap capital offset by robust regulation, are the best placed industry to offer affordable small dollar loans to those in need.
“Without us, consumers end up in much worse markets of last resort,” said Jared Kaplan, CEO of OppLoans, a fintech that works with banks to service small dollar loans with alternative data. “There is no question that banks are best positioned for this type of lending.”
“It is a very positive first step for regulators to see that this market is there and is going to get credit – and it is better to have it in a highly regulated sector,” he said.
Hunt said a critical mass of banks would be unlikely to enter the area and run out of predatory lenders if they were overly constrained by regulators or feared a general election could turn the small-dollar lending environment upside down could ask.
“For a bank to start investing millions of dollars in getting this back, it takes a long-term commitment,” said Hunt. “You can’t just switch it on with a different administration every four years. We need longevity, we have to give the product time to develop. ”
Along the road
Regulators have remained silent about what exactly future guidance might include. But both banks and consumer advocates assume that the regulators could be more specific given reasonable pricing conditions.
Consumer groups fear that the upcoming guidelines could enable banks to offer riskier products.
“My concern is that the upcoming guidelines on small dollar lending will aim to give banks the green light to lend expensive because banks don’t need guidelines to provide affordable small dollar lending,” Saunders said at the NCLC.
Banks fear the opposite – that the supervisory authorities will set a restrictive interest rate limit of 36%. This is the current legal limit for loans for military personnel.
“We certainly don’t want a 36% cap,” said Cato’s Zuluaga. Given the risks and costs of lending to customers with the lowest creditworthiness, he said “it would only limit access to credit for those who need it most”.