Shutdown highlighted need for bank-backed small-dollar loans
A tremendous amount of attention rightfully was given to the financial hardships furloughed employees faced during the monthlong partial shutdown of the federal government. I am proud to say banks proactively stepped up to the plate.
But that did not stop the letters from Congress inquiring how financial institutions were helping furloughed workers — despite efforts being well underway long before politicians weighed in. There are millions of Americans, however, who needed short-term financial assistance before the shutdown began and who continue to need it now that the shutdown has ended.
Oddly, members of Congress did not say a word when regulatory guidance issued in 2013 effectively stopped banks from helping the nearly half of American adults who cannot cover an emergency expense of $400, according to the Federal Reserve. Just like the shutdown, life has a way of throwing curve balls at us. Whether it is a trip to the doctor, a car repair to drive to work or child care, no matter how financially prepared consumers might be, situations can place serious monetary strain on a typical family.
Some banks used to offer short-term, small-dollar lending products, known as deposit advances, to meet consumer demand for access to emergency credit. The 2013 guidance issued by the Office of the Comptroller of Currency and Federal Deposit Insurance Corp. effectively eliminated the ability of well-regulated financial institutions like banks to offer a viable alternative to payday lending. The new guidance recommended the use of underwriting more appropriately applied to a much larger mortgage loan. In addition to this guidance, the Consumer Financial Protection Bureau issued its payday rule in late 2017 (which it has recently proposed overhauling).
What are these families supposed to do to make ends meet? Despite the best efforts of banks, the answer is awfully similar to what some furloughed federal employees were forced to do: turn to more expensive sources of cash like pawnshops, payday and title lenders or online lenders. American families should be able to rely on their banks instead of being forced to resort to these less regulated, more costly lenders.
Banks are ready to help, but rules and guidance from Washington pushed these people away from banks years ago and many have not returned.
Since this guidance was issued and the rule adopted, access to small-dollar credit through traditional banking systems has diminished, while the payday lending market has increased. The OCC has since amended its guidance and the CFPB has made significant strides to help banks reenter this space for their customers. The FDIC is also currently in the process of reviewing the small-dollar loan marketplace.
Banks are in a unique position to help millions of Americans in need of small-dollar credit. Banks are thoroughly supervised, amply regulated and well capitalized institutions in which U.S. consumers will find fair pricing coupled with established consumer protections. However, overly restrictive federal guidance and rules pushed consumers into more unfavorable alternatives with higher costs and less oversight.
Just last month, the Consumer Bankers Association wrote the FDIC in response to their review explaining how existing regulatory guidance has curtailed banks’ ability to help customers by offering short-term, small-dollar products and requested they rescind the 2013 guidance.
We also urged all the federal banking regulators to work together to issue small-dollar loan rules that help banks and consumers. These rules should be based on sound evidentiary conclusions, provide for reasonable and complete consumer protections; allow greater reach to the unbanked and underbanked; provide an option for banks to offer small-dollar loans as a line of credit; provide banks with a clear and easily applied standard that consumers will understand; and allow for flexibility to meet consumer needs through innovative and competitive credit options.
In the past, payday lending products have been inaccurately associated with bank-offered deposit advance products with little or no distinction in how bank-offered products allow for greater consumer protection and better customer pricing. Nothing could be further from the truth.
Bank-offered small-dollar loans are only available to individuals with a preexisting customer relationship with the bank, have built in cooling off periods, include an ability to repay analysis based on the customer’s checking account and scheduled deposits and, most important, come with extensive disclosures and consumer protections.
Banks were able to help furloughed federal employees during this past government shutdown — and were able to do even more thanks to guidance from federal regulators. Banks are also ready to help more Americans facing financial hardships and hope those same regulators will work to give banks the chance.