We have all been there: an inopportune flat tire, a refrigerator on the fritz or a hefty medical cost arising out of the blue. These are just a few examples of unplanned, often-untimely emergency expenses that every family experiences at one point or another.
Compounding these challenges, nearly half of American families do not have the necessary savings on hand to cover a $400 emergency expense. In these situations, banks, much like they have done in the past, can play a vital role by helping families overcome these challenges, but regulators must allow banks to help instead of sending Americans facing financial hardships to other less-regulated, more-costly lenders.
Thankfully, now we have regulators serving who recognize consumers’ need for short-term, small-dollar credit. Until recently, a Washington-knows-best mentality was pervasive throughout the regulatory agencies when it came to small-dollar loans. In 2013, the Office of the Comptroller of the Currency issued guidance that effectively sidelined banks and prevented them from offering small-dollar loans to consumers. Taking the first step to reverse this trend, former acting Comptroller Keith Noreika revoked the guidance. Now, Comptroller Joseph Otting has spoken out on the need to “clarify” the OCC’s support for bank offered small-dollar loans. Updating the OCC’s guidance is an important step toward allowing banks to once again help consumers in need — but in Washington it is never that clear-cut.
Over the years, regulatory agencies have produced competing and conflicting directives in the small-dollar lending space. During former Consumer Financial Protection Bureau Director Richard Cordray’s final days in office, a rule was released that essentially mimicked and reapplied aspects of the OCC’s now revoked 2013 guidance. The end result: Consumers who need access to safe, affordable short-term loans continue to be forced into the waiting arms of riskier, more costly payday and other fly-by-night lenders.
Under the CFPB’s rule, overly complicated underwriting requirements and regulatory hurdles would be instituted, thus making the loans too costly for consumers. While the CFPB provided a few carve outs to allow some lenders to skirt the industry-wide rule, these exceptions offer little practical use or meaningful impact for consumers needing access to credit. Simply put, there would not be enough bank loan supply to meet consumer demand.
Recently, acting CFPB Director Mick Mulvaney has indicated the bureau will review and possibly update its final small-dollar rule. This is an important decision and it would begin to bring clarity and proper coordination between the regulatory agencies.
Before overregulation effectively eliminated the product, many banks offered short-term, small-dollar loans to consumers by way of deposit advance products, which were carefully designed loans with strong safeguards, at reasonable prices for consumers. In addition to being well understood and well liked by consumers, these loans had low default rates and offered protections consumers would rarely receive from other lenders, such as an ability to repay analysis and built in “cooling off” periods to help prevent overborrowing. Furthermore, banks provided their customers with strong account security measures, clear and comprehensive disclosures and, in most all cases, longstanding, pre-existing relationships.
Every banker I have talked to agrees, proper rules and regulations must be put in place to hold bad actors accountable and protect consumers. However, rules must not be overly prescriptive, force consumers to borrow more money than necessary or place arbitrary caps on responsible consumer use of small-dollar products.
New leaders at the key banking regulatory agencies have stated an intent to reexamine and streamline the regulatory process and unify the rules and regulations governing bank small-dollar loans. This is great news for consumers.
With millions of Americans facing difficult financial challenges each and every day, Washington cannot continue to bury its head in the sand. The reality is nearly half of American consumers need access to short-term credit and this challenge must be met head on with meaningful, impactful policy and regulatory solutions. The current rules force Americans out of a safe, well-regulated banking system and towards less-regulated, more-costly and potentially predatory lenders.
It is important that all the banking agencies, including the OCC, CFPB and the Federal Deposit Insurance Corp., work together to examine the use of safe and affordable bank-offered, small-dollar loans so Americans can once again obtain the funding they need to overcome financial emergencies and, ultimately, meet their long-term financial goals.
Thankfully, we now have regulators serving who understand the financial needs of American families.