When three-quarters of Americans are living paycheck-to-paycheck, why would regulators in Washington make it even harder for consumers to make ends meet?
In recent weeks, we have seen increased scrutiny of bank products and services designed to meet the short-term liquidity needs of consumers who cannot or choose not to obtain other forms of credit. Within the span of two days, three federal agencies competed for the gold medal in a "regulatory Olympics" over deposit advance products offered by banks.
These products, offered by a handful of banks, are the target of supervisory guidance proposals from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. and a critical white paper issued by the Consumer Financial Protection Bureau. The impact of these proposals would severely constrain banks' ability to offer these valuable products and assist their customers.
There always has been a need for small-dollar, short-term credit. Historically, the OCC and FDIC have encouraged depository institutions to meet this particular consumer need. These products are carefully designed to ensure strong safeguards at reasonable prices. Deposit advance loans are cheaper than payday credit, are highly transparent, require heavy disclosure and compliance with federal law, and have received positive feedback from borrowers. These products are designed for customers who already have deposit accounts at the bank that is providing the loan.
Without waiting for the results from the CFPB's analysis, the OCC and FDIC have proposed a very prescriptive set of standards which will effectively kill the products. While the proposals claim safety and soundness concerns, the agencies fail to provide any clear evidence to support this. Banks have offered these products for many years, including one for nearly two decades. During this time the products have yielded positive reactions from regulators and demonstrated that close working relationships between banks and their supervisors can result in services that meet consumer's needs.
The prudential regulators' attempt to weigh in will severely limit the ability of banks to offer deposit advances, leaving most with little choice but to leave, or never enter, the short-term credit market. In the absence of bank-offered deposit advance products, consumers will be pushed out of the traditional banking system and into more expensive and often less regulated alternatives such as non-depository payday loans, pawn brokers, title loans and other sources of short-term, small-dollar lending. Without reasonable alternatives, consumers will pay higher prices for short-term liquidity or may face increased delinquency, late payment, nonsufficient fund, and returned check fees.
Competition among banks will ensure greater innovation, which ultimately will lower the cost of short-term, small-dollar credit options for consumers. Restricting the available products will have the opposite effect.
Regulatory intervention without clear evidence of risk or careful consideration of the consequences to consumers is a bad precedent and contrary to the policy objective of the prudential regulators.
I hope cooler heads prevail.
Richard Hunt is president and CEO of the Consumer Bankers Association.