Uncertainty over CFPB makes banks wary of small dollar loans


The Trump administration has urged banks and credit unions to compete with high-cost payday lenders to provide more credit options to consumers. But banks remain wary of a product they still consider risky, observers say.

Bank prudential regulators issued guidance in May encouraging banks to adopt low-value loans to help consumers affected by the coronavirus pandemic. Two days later, the Consumer Financial Protection Bureau approved a process for banks to offer installment loans or lines of credit for amounts up to $ 2,500.

But nearly two months later, banks are said to still balk at a product that the industry for the most part has long regarded with reluctance.

Bankers remain concerned about the profitability of these products. The upcoming presidential election, which may determine who heads regulatory agencies, also raises questions about the sustainability of recent directions.

“As soon as those rules change, they can go backwards, so for a bank to spend a lot of time and effort creating a product suitable for that market and for the rules to change within a year, it’s hard to ‘imagine that they will. that work, ”said Doug Farry, co-founder of Employee Loan Solutions, a Solana Beach, Calif., technology company that helps employees qualify for low-cost loans.

A recent Supreme Court ruling that made it easier for the president to fire a CFPB director calls into question the job security of the current director and, therefore, the sustainability of guidelines for lending small dollars.

Bloomberg News

The recent stance of regulators in the Trump administration contrasts sharply with warnings to banks by the previous administration about the supply of small loans.

But with less than four months of the 2020 election, polls favor alleged Democratic candidate Joe Biden. And a recent Supreme Court decision allowing the president to more easily dismiss a CFPB director calls into question the job security of Kathy Kraninger, the agency’s current director.

So far, only a handful of banks offer well-known loan products for small dollars. US Bank in Minneapolis offers loans between $ 100 and $ 1,000. KeyBank in Cleveland offers a KeyBasic line of credit between $ 250 and $ 5,000.

“It’s going to take a while,” said Alex Horowitz, senior executive at Pew Charitable Trusts, who has spoken to banks and service providers about creating low-cost loan products.

Others have suggested that banks may wait for the political and regulatory environment to stabilize, as the election could lead to a shift in regulatory policy.

If President Trump loses the election, many expect Kraninger’s days to be numbered in a Joe Biden administration. The Supreme Court ruling allowed CFPB directors to be terminated at will, overturning a legal provision of the Dodd-Frank Act.

Richard Hunt, president and CEO of the Consumer Bankers Association, said the court ruling last month upset banks’ plans to develop low dollar lending products.

“Banks want to serve their customers, but with the uncertainty surrounding the US Supreme Court’s decision to create a [CFPB] director during an election year, I wouldn’t expect many institutions to invest time and resources in a new product, ”said Hunt.

The long-awaited guidelines released on May 20 by the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve, and the National Credit Union Administration include general principles rather than prescriptive rules on how banks can generate safe little dollars. ready.

Horowitz called the guidelines of prudential regulators “sustainable” because they reflect the work carried out over many years by career staff. As long as financial firms stick to long-term loans that can be repaid over 45 days, they are protected from legal liability, he said.

Additionally, regulators have only given banks the green light to offer installment loans, not payday loans under 45 days. Payday loans have drawn anger from former regulators and consumer advocates for pushing borrowers into a debt spiral by repeatedly renewing loans, prompting the CFPB to draft its payday lending rule of 2017 that the CFPB recently revised.

“The political and regulatory risk is entirely on the side of loans with 45 days or less,” said Horowitz.

Immediately after prudential regulators released their guidance, the CFPB released an approved template that banks can use to research a “no-action letter” – designed to allow companies to develop products without fear of downfall. supervision – to provide installment loans or lines of credit for amounts up to $ 2,500. The model was requested by the Bank Policy Institute, a Washington business group.

But banks are reluctant to offer small loans not only because federal policy could change, but also because they fear the loans will not be profitable, many observers have said.

While many applaud the efforts of the CFPB and federal regulators to increase competition for low dollar loans, there remains a major underlying economic difference in the way banks and low dollar lenders produce and collect loans. Banks tend to focus on a relatively small number of large loans, each with a low probability of default, rather than a large portfolio of small loans, each with a higher probability of default.

“Even with the encouragement and guidance from regulators, banks have yet to find a way to make the economy work,” said Farry of Employee Loan Solutions.

Yet when the coronavirus began to spread in the United States in late March, demand for the U.S. bank’s simple loan first surged, said Lynn Heitman, executive vice president of product strategy and support at the bank.

Heitman said the U.S. bank responded by lowering the price of three-month loans to $ 6 per $ 100 borrowed from $ 12 to $ 15 per $ 100 borrowed.

“It was absolutely an effort to help our customers during a very difficult time,” said Heitman, who plans to phase out lower prices over the next month as demand subsides. “We designed the product to have three stool legs: to be durable, accessible and transparent so prices and terms are easy to understand. “

The 70% to 88% annual loan percentage rate may seem high, but it includes the borrower protections recommended by Pew. Payments cannot exceed 5% of a borrower’s monthly income and there is a 30-day waiting period between repayment of one loan and request for another.

Heitman said she has received requests from other banks and business groups on how to structure small installment loans. She cautions that there are many factors that go into how consumers manage their money.

“It’s a very different product,” she said. “The need is there, the price is right, but there is more to the unknown than to the known. “

Ben Morales, CEO of Q-Cash Financial, a unit of the Washington State Employees Credit Union, said he expects banks and credit unions that ultimately decide to offer small loans s ‘associate with fintechs and others who have automated the process.

“The challenge for banks is how to do it efficiently and cost effectively,” Morales said.

Some nonprofits and credit unions have for years offered small loans at much lower costs than payday loans. But banks still view the space as filled with risk.

“Ten years ago, no one was offering loans with annual percentage rates between 36% and 465%, and now US Bank is there with 70%,” said Paul Woodruff, executive director of Prosperity Connection, a St. Louis-based non-profit organization that has offered small lines of credit to low-income consumers since 2007. “If you run a bank and now have a mandate to offer money-losing loans , increase the risk and entail all of that expense, it’s a no-win situation. . “

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