A Prescription for Small-Dollar Loans:
The best way to lower the cost of payday loans and other forms of small-dollar credit is to develop techniques that distinguish between illiquid and insolvent borrowers, according to the Bipartisan Policy Centers Aaron Klein. "Better separating consumers who are likely to repay from those who are postponing the inevitable will drive down costs for providers and increase competitive forces to lend to borrowers who need the funds and can pay back a reasonably priced product," Klein writes. Several readers weighed in with their own analysis of tactics for improving the small-dollar credit market. "Nothing can improve upon good underwriting," writes commenter Gary Lewis Evans. "I watched FICO grow in use and cause a drug-like reliance in lenders. Big data has some value but we need other old school techniques to make this work for people that don't have big data to access." Another solution is to turn more of the market over to low-income-designated credit unions, according to commenter PRLynn. "I don't think commercial banks would mind giving up this market segmentand perhaps they can figure out alliances with LID credit unions to help 'prime' borrowers to be able to graduate to more sophisticated financial products that will better serve their long-term needs," PRLynn writes.
Shadow-Boxing the Shadow Banks:
Federal regulators should police shadow banking activities rather than shadow banks themselves, according to William Shirley, counsel in the New York office of Sidley Austin. " The entities engaged in shadow banking are too diverse," Shirley writes. "Identifying these firms by their size alone does not ensure that we capture systemically important economic activities." Shirley also suggests that regulators publicly acknowledge that "at just about every turn the regulation of individual firms is being used in an effort to reduce risk in financial system as a whole" in order to further a more straightforward public policy discussion. Readers were on board with Shirley's recommendations, though there was some debate over how much the size of a firm influences bailout decisions.
Also on the blog:
The city of Richmond, Calif., has approved a plan to use the power of eminent domain to seize underwater mortgages in an attempt to help struggling homeowners avoid foreclosure. But Richmond needs to team up with another municipality in order to move forward with the plan, according to attorney Michael E. Reyenand so far it's still flying solo. The Federal Housing Finance Agency's opposition to the use of eminent domain is one big deterrent for Richmond's potential partners, Reyen says. So is the fear of lawsuits filed by the banks and trustees that own the rights to the mortgages.
There's a big hole in the conventional narrative about the collapse and rescue of American International Group, according to Hester Peirce, a senior research fellow with the Mercatus Center at George Mason University. She says it wasn't just AIG's derivatives dealer, AIG Financial Products, that brought it to its kneesthe insurer's securities lending program also caused a lot of trouble. The takeaway? "AIGs problems were not confined to one unregulated corner; problems also arose in full view of insurance regulators," Peirce writes.
A disproportionately silver-haired board room or management team can come at a cost to banks' strategic planning, writes Paul Schaus, president of consulting firm CCG Catalyst. "Bank leadership teams with age diversity can help move their institutions from reactive, short-term planning to more visionary, long-term thinking," Schaus writes.
Wells Fargo and other mortgage lenders are lowering their credit score cut-offsbut that doesn't necessarily mean they're taking on a higher level of risk, according to Barrett Burns, the chief executive of credit scoring company VantageScore. "A given credit score is not a static representation of a consumers risk profile," Burns writes. "The relationship between a credit score and a borrower's risk profile changes over time."
Retiring HSBC chief Irene Dorner is the latest female executive to tumble from the glass cliff, writes Heather Landy, editor in chief of American Banker Magazine. Landy points out that women frequently rise to the top of companies during a time of crisis and vow to save the day. "The problem with having women hitch their fortunes to turnaround stories is that turnarounds are hard to pull off," Landy writes. "And when they happen, they tend to unfold slowly something that doesnt mesh well with the short-termism that pervades corporate America."
Americans who lack affordable access to credit and cash may soon be helped by loans with income-based repayment plans and credit scoring systems that take on-time rent and utility payments into account, writes BankThink deputy editor Sarah Todd.