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.
Mr. Gilbert, who does not work for a payday lender, makes a case for opening markets to competition and innovation. Of course it will require regulations and guidelines, but selfishly clinging to the past as Mr. Prochaska suggests is certainly not the way to solve these issues.
There is a need to allow additional entities to compete for customers who can benefit from increasing access to credit is a step toward addressing this growing problem. Consumers stand to benefit from increased choice, competition, and innovation in the financial services market. Obviously, the more reasonable choices people have, the less need they will have to pawn valuables, family heirlooms, and other possessions when facing a tough financial situation. That is what pawnbrokers are afraid of.
Under this bipartisan legislation, any nonbank -- regardless of size or location -- can apply for a federal charter, just as community banks today have the choice to operate under a federal bank charter. Both nonbanks and their customers will have more choices in the finanicial products that serve them best.
Small nonbank lenders focused on value, innovation, and customer service have nothing to fear and much to cheer from the competitive federalism approach of H.R. 1909, which would bring the system of optional federal chartering that has existed for the banking industry for 150 years to nonbank lending. It's an idea whose time has come.