The U.S. Treasury is looking beyond the insured banking system in an effort to improve the delivery of viable credit alternatives to consumers.
It recently requested public comment on the implementation of section 1204 of the Dodd-Frank Act, which authorizes the secretary, "to establish a multiyear program of grants, cooperative agreements, financial agency agreements, and similar contracts," to promote initiatives that enable low- and moderate-income individuals to establish accounts, "on reasonable terms," at federally insured depository institutions.
The request specifically asks for suggestions on how to help these individuals establish accounts at federally insured institutions — and qualified non-banks. It also asks for ideas on promoting innovation in the development of sustainable financial services and products.
Under section 1204 the secretary is authorized to prescribe regulations regarding how participating entities may provide these account-based products and services, including small-dollar loans.
Given that the unmet demand for consumer credit is huge and growing, many approaches can, and should, be taken to meet it
One of the most effective would be for Treasury to support joint ventures and partnerships between insured institutions and specially qualified, innovative non-banks that provide affordable small-dollar loans, and related services, to consumers.
Expanding participation beyond insured institutions is critical for the successful implementation of section 1204. These institutions have been unable to solve the problems up to now, why would results be different in the future?
Some experts believe success can be bought by providing credit rate subsidization through federal grants or other taxpayer funded subsidies. This may be appropriate in some limited circumstances, but subsidization is not a viable economic or political approach to resolving the overall problem.
In today's tight economic times it's unrealistic to think Congress could or would provide ongoing taxpayer credit subsidization totaling billions of dollars annually for the perhaps 90 to 100 million Americans who need small-dollar credit.
Treasury should take the opportunity to be bold. It should move beyond section 1204 and secure legislative solutions that would remove the major structural roadblock to credit access: the inability of non-banks to operate nationwide.
A solid framework for this is in the works: H.R. 1909, sponsored on a bipartisan basis by Rep. Joe Baca and other members of Congress provides for an optional non-depository special-purpose federal lending charter available through the OCC.
Non-banks already provide a large portion of small-dollar credit, amounting to billions of dollars annually. Unlike federally insured institutions, they cannot operate efficiently nationwide. Lenders that do are forced to limit product offerings and incur substantial compliance and other operating costs, which raise consumers' borrowing costs.
Nimble, well-capitalized, cutting-edge non-banks with expertise in lending to consumers typically have considerably lower operating costs, as well as more flexible credit standards, than banks.
If they could further lower their costs and enjoy the flexibility and efficiencies provided by a national charter, they could both significantly lower costs to consumers and offer better small-dollar loans and related products and services.
This outcome alone would deliver tangible value to millions of American consumers.
Ryan Gilbert is CEO of BillFloat, a provider of consumer credit and bill payment solutions.