BankThink

The little-noticed power grab in regulators’ small-dollar guidance

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Last week, I awakened to a first: an ad on Washington’s all-news station touting pawnbrokers.

A surer sign of the times is harder to find, reaffirming the importance of providing stressed families with short-term financing alternatives. Relief has come in the wake of the new interagency statement on “responsible” payday lending.

The four federal financial agencies last month released new guidance meant to create a uniform framework for banks and credit unions on how to offer small-dollar consumer loans without raising regulatory red flags.

However, this guidance comes with a kicker: Banks may make short-term, small-dollar loans only with pricing that “reflects overall returns reasonably related to the financial institution’s product risks and costs.” This may seem a sensible bar to predatory pricing, but it’s also a precedent-setting intrusion by regulators into governing what “reasonable” is when it comes to profit.

The concept of “just pricing” is a time-honored one perhaps most effectively espoused by Pope Francis. It has also gotten considerable play as the “just capital” movement advanced. However, it’s more than unusual to see an express regulatory demand that banks earn not what they can, but what they should.

The overall construct of U.S. consumer finance rules is premised principally on disclosures due to faith — often unfounded — that prices known are prices disciplined.

Legislators from time to time have sought to restrict financial-product pricing, but even the most liberal regulators “democratized” finance not by setting prices, but by liberalizing rules and, in the case of the Clinton administration’s agencies, rewriting the Community Reinvestment Act as a more than gentle prod.

The Office of the Comptroller of the Currency added a similar pricing constraint in a 1999 guidance on subprime mortgage lending and, given how badly that worked out, thought better of it thereafter.

Instead of express pricing restrictions, bank rules generally regulate predatory practices via disclosures and express limits on potentially predatory terms and conditions. An overarching pricing edict has long been eschewed out of fears of trampling on a legitimate prerogative of private companies.

That this barrier was breached is surprising; that Trump appointees did so is shocking.

It’s possible that the new reasonable-pricing mandate was accidentally inserted in guidance no one read with care, but I doubt it. When lending is advanced for social-welfare purposes, it comes with social-welfare strings attached.

This isn’t necessarily wrong, but it’s certainly different. Congress has already deputized banks as federal lending agents and many want banks moved still further into a purely agency role via central-bank “digital dollars.”

The Fed has essentially taken over wholesale finance, Democrats are demanding public credit-rating and scoring systems and, late last week, also new public banks.

It’s impossible to tell yet if the construct of private banking will be structurally reconfigured after the coronavirus pandemic because it’s impossible to tell when the economy recovers, and which financial institutions still stand tall when it does.

The 2020 election will of course also make an enormous difference in what is not just demanded of banks, but also extracted from them. However, change seems well on its way.

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Small-dollar lending Payday lending Consumer lending Law and regulation Compliance Interest rates OCC Coronavirus
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