The burden of proposed federal rules on small-dollar loans is a key factor in determining whether banks and credit unions innovate and offer alternatives to payday loans. But the importance of flexibility from regulators in spurring development of small-dollar loan products is not just academic. Short-term credit solutions already in the marketplace likely wouldn't have made it out of the design stage in a harsher regulatory environment.
The payday lending abuses regulators are targeting present traditional lenders with a clear opportunity. Using new technology, banks and credit unions can help people tackle life's financial emergencies with short-term, small-dollar loans at reasonable rates. However, meeting this need is at risk under the Consumer Financial Protection Bureau's well-meaning but too restrictive draft rules on small-dollar lending.
The reasons people need access to such loans include everything from an unexpected car repair to cash-only purchases to tooth trouble. Mission-driven financial institutions such as WSECU think about these consumers a lot. Our goal is to care for members who need convenient access to money when other options aren't available.
Regulators clearly have these borrowers on their minds too. The CFPB thought about those consumers to the tune of 1,300 pages of specific, restrictive proposed rules on small-dollar lending. The bureau isn't alone. The U.S. Treasury also recently offered its take on what it says are needed system changes, calling for greater transparency in marketplace and online lending.
While we applaud the intention to curb the abuses of bad lenders, unfortunately, the rules as proposed by the CFPB may also have the unintended effect of driving away consumer-friendly financial institutions that provide better alternatives.These could include institutions doing great work with underserved communities like Shreveport Federal Credit Union in Louisiana or San Francisco's Northeast Community Federal Credit Union, both of which offer payday loan alternatives that would be at risk given the compliance pressures of the draft rules.
The proposed rules are too complex, too prescriptive and will stifle the very innovation needed to serve this market. If enacted as written, they will drive up costs for borrowers and may scare off good lenders who might enter the market.
WSECU and its wholly-owned subsidiary, Q-Cash Financial, have been offering small-dollar, short-term loans for more than a decade. Now on a path of growth, Q-Cash recently began serving three new institutions. Interest is being tempered with some concern; one credit union that expressed interested in partnering on short-term lending recently dropped out of the pipeline following the release of the proposed rules.
It was no small effort for WSECU to jump into this area of financial services. The need was clear enough. More than 10 years ago, we began noticing members leaving our branches for storefront payday lenders to get quick cash. On paydays, members stood at our teller lines requesting cashier's checks made out to known payday lenders. Obviously, there was something the credit union wasn't delivering that consumers needed and used.
So WSECU began offering an alternative to payday loans. In the case of Q-Cash, it took WSECU years of development — and it took years of not making any money. The margin was small and the overhead was high — not a profitable ratio. It was only through a process of try, then iterate, and then try again, that the credit union was able to develop Q-Cash into what it is now: an automated underwriting solution that funds loans in six clicks and 60 seconds. Technology allowed WSECU to meet the goal of serving members who demanded speed and convenience.
Leveraging technology is a critical component in making small-dollar loans profitable for the lender. And banks and credit unions are really at the nexus of this opportunity. Sure, there are plenty of fintech companies ready to make a go at quick consumer lending, but they will likely never have the reach or the credibility of products offered by traditional financial institutions.
The CFPB's approach risks discouraging traditional lenders from entering the market rather than encouraging innovation.
Simple and flexible rules work better than strict and prescriptive regulations in fostering innovation needed to meet consumer demand for value, speed and ease. The CFPB's proposal would stifle innovation and inhibit fresh solutions from being tried and tested. Under these conditions, with the cost of compliance so great, the lenders the CFPB would like to see offer better options than payday lenders simply won't be willing to experiment in this space. Why?
The draft rules require a laundry list of added manual processes including verifications, projections and determinations of all sorts. They call for reports, restrictions and refunds of fees under certain conditions. For Q-Cash, these demands to add manual processes will reduce efficiencies that come from automation, restrict flexibility and increase overhead costs. That's not a win for consumers.
Market flexibility allowed our institution to reduce costs and improve access to cash for a segment of borrowers that have true needs and few reasonably priced options. Now, we're on our way to providing these loans to more consumers because we're able to use technology to scale the products after years of iteration. Q-Cash is in talks with additional U.S. and international financial institutions about partnerships.
If the CFPB proposal had been in place when we initially designed Q-Cash, it is unlikely that we would have been able to get the product off the ground. The same is likely true for other traditional financial institutions with products currently in the marketplace.
During the comment period on the CFPB proposal, the industry has the chance to communicate the message that banks and credit unions stand ready to serve the small-dollar loan market but need the flexibility to make it happen.
Let's collaborate to develop better choices for consumers through innovation, not overly prescriptive regulation. Otherwise, there will be very few choices at all for people in need of short-term loans.
Kevin Foster-Keddie is president and chief executive of Olympia, Wash.-based WSECU. Its subsidiary, Q-Cash Financial, offers a cloud-based lending solution for small-dollar, short-term consumer loans. Foster-Keddie also serves as chair of the Consumer Financial Protection Bureau's Credit Union Advisory Council.