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Raj Date, the former deputy director of the Consumer Financial Protection Bureau, plans to work with banks to create cheaper short-term loans for cash-strapped customers, despite mounting regulatory scrutiny of the products.
June 7 -
Facing strict new guidelines on deposit-advance loans, banks must now decide if it's worth their while to offer short-term credit to cash-strapped borrowers.
April 25 -
Regulators' plans to force banks to consider a borrower's ability to repay small-dollar, short-term advances on their direct deposits and limit the frequency of borrowing would likely upend current business practices.
April 24
I disagree with "the small-dollar credit problem" as presented by Raj Date, former deputy director of the Consumer Financial Protection Bureau, who believes that banks
Since 1997, my company has provided financial services, including payday loans, to the underbanked. We have seen dozens of financial institutions, including startups, nonprofits, banks and credit unions, enter the short-term lending space. These firms decry the payday loan product while attempting to introduce a cheaper substitute, only to close their doors months later or eliminate the product from their portfolios. The federal government, specifically the Federal Deposit Insurance Corp., conducted what
The effort to create low-cost consumer credit is certainly a worthy one. But, as the banks participating in the FDIC's pilot program learned, pricing must reflect the realities of the marketplace as well as the mitigation of risk to capital. Like every other corner of a free market economy, if prices were excessive, new entrants would crowd into the market at lower price points.
As the debate surrounding the cost of credit products continues, we can't ignore the fact that onerous regulations will only drive up pricing. This becomes particularly concerning as lenders face dueling mandates from regulators. For example, regulators want lenders to conduct more underwriting, and, at the same time, they want lenders to make more loans. Date seems to understand the complexities of doing that. As he explained in his remarks at the recent Underbanked Financial Services Forum, it costs a bank $700 to underwrite a $500 loan. So why offer the loan?
We can agree that better data and a continuous focus on our customers' ability to repay may help improve existing products. However, it will not replace payday loans or reduce consumer demand for them. Instead of replacing products, why don't we welcome competition and let the market (i.e. consumers) decide what works best?
We need an assortment of short-term credit products from various lenders banks and nonbanks alike to serve consumers. Overregulation and elimination of alternatives will merely set consumers back, particularly when criticism of existing products comes with no new solutions.
Ted Saunders is CEO of Community Choice Financial , which provides financial services, including payday loans, to consumers.
