Ryan Gilbert's recent BankThink article "Give Nonbanks a Nationwide Reach" is part of a massive lobbying campaign by major payday lenders and others to sway Congress to pass H.R. 1909.
The National Pawnbrokers Association opposes the federal charter proposal Ryan Gilbert supports, because it is a bad deal for consumers and will further degrade credit options for the 44 million un- or underbanked consumers in the U.S. This legislation will provide the means for a powerful group of pay day lenders (including Gilbert's payday loan company BillFloat), subsidiaries of national banks and others to circumvent existing federal, state and local regulatory oversight, including provisions within the Consumer Financial Protection Bureau set forth to reign in predatory lending tactics by nonbank institutions.
Additionally, this potentially dangerous legislation will allow "big finance" to unfairly compete with community and small dollar lenders across America and the thousands of people employed by locally operated nonbanks like our small business members.
These charters are a bad deal for consumers. Specifically, charters will:
- Be granted primarily or exclusively to giant providers of financial services in the payday loan industry and subsidiaries of national banks and federally chartered thrifts already under the Comptroller's regulation and supervision authority, providers who can afford the charter and annual fees the Comptroller will charge.
- Allow charter holders to go anywhere and do anything as long as the Comptroller allows it and without worrying about state licensing or state consumer protection laws;
- Allow charter holders to offer financial products that particular states have banned or regulated heavily — if, like the old "Mother, may I? Yes, you may!" game, the Comptroller gives them permission. As a result, charter holders could offer payday loans in states that banned them outright (Ohio, North Carolina, Arizona, and Massachusetts), in states that cap interest rates (Georgia, Montana and New Hampshire), and in states such as Virginia that limit the number of payday loans that can be made in a year to the same consumer.
- Exempt charter holders from complying with the Truth in Lending Act's baseline credit-cost comparison tool — disclosure of the annual percentage rate — that every other creditor in the nation has had to disclose since 1969, making comparison shopping much harder for consumers.
- Exempt them from using the same TILA disclosure forms, created by the Federal Reserve Board, that every other creditor in the nation will still have to use, further hindering comparison-shopping by consumers. Instead, they will be allowed to use different disclosure forms over which the Comptroller will have exclusive jurisdiction.
Charter holders, as a result, will be able to compete at lower costs than smaller, state-regulated entities. Lower costs for charter holders do not guarantee that credit will be more plentiful — or that consumers will pay less for credit, although that is what the proponents of HR 1909 are promising. In fact, once their competitive advantages drive out local small-dollar credit providers, the basic economics theory of supply and demand points to higher costs for the same products and services. This future financial un-level playing field and associated revenues obviously justifies the proponents' huge expenditures on their lobbying campaign.
This federal-charter legislation is touted as a panacea for the alleged paucity of small-dollar loans across the nation because banks do not offer this type of credit. It is important to set the record straight on this claim as well:
- Big banks have never provided small-dollar, short-term loans (unless one counts credit cards that most of the 44-million un- or under-banked consumers cannot get). Efforts over the past decade to persuade banks to offer similar products, encouraged by Congress and the FDIC, have produced few, if any, noticeable gains for consumers. and,
- Thousands of state-licensed providers already grant credit to the consumers on terms established and enforced by the states, and with the same TILA compliance duties as every other creditor. Other small businesses provide all the so-called "auxiliary" services such as issuance of money orders and remittance transfers that the states also have regulated effectively for several decades.
Supporters of this legislation are selling a bill of goods to some well-intended members of Congress, who are justifiably eager to help constituents at home. This legislation:
- Casts aside more than 200 years of state regulation of nonbanks, and does vast damage to states' rights and federalism.
- Allows powerful mega-retailers and nationwide payday lenders, and, not incidentally, subsidiaries of national banks or federal savings and loan associations, to circumvent existing federal, state, and local regulatory and consumer protection laws.
- Makes credit shopping harder and credit offers far less transparent than they have been for more than 40 years.
Instead of creating a vast new supply of credit on reasonable terms from newly federally chartered providers, the legislation is far more likely to degrade further the credit opportunities, the assets and credit worthiness of consumers in the U.S. who need competitively priced small-dollar, short-term, safety-net loans that they get today from local community banks, credit unions, pawnbrokers and other state-licensed lenders. It also will cost local jobs and the health benefits.
This legislation is a "win-win" for mega-companies and mega-banks and "lose-lose" for everyone else. Hopefully, Congress will recognize the bill's flaws and will soundly reject the idea of a federal, non-depositary charter.
CEO, Lombard Financial
President, National Pawnbrokers Association