CFPB Presses Banks, Credit Unions to Offer 'Small-Dollar Loans'
February 09 2016 - 12:40PM
Dow Jones News
WASHINGTON—The Consumer Financial Protection Bureau, preparing
to roll out rulesaimed at reining in high-interest payday loans,
is jawboning banks and credit unions to provide better alternatives
for borrowers in need of small, short-term loans.
Richard Cordray, director of the watchdog agency, said it is
discussing ways to make it easier for banks and credit unions to
offer "small-dollar" loans. The step could put the agency on a
collision course with banking regulators, who have discouraged
traditional banks from offering such loans. It could also fuel
opposition from the $38.5 billion payday-lending industry, which
fears the new rule would wipe out much of its business.
"I personally believe banks and credit unions can be low-cost
providers of small-dollar loans," Mr. Cordray told The Wall Street
Journal. "I think that working with banks and regulators involved,
there would and should be an ability for them to offer decent
products."
Mr. Cordray didn't offer specifics about the rule, but said
banks could offer small-dollar loans as "rescue products" for their
customers. Under a draft of the rule released last March, lenders
would be required to verify the borrowers' ability to pay back the
loans, limit the number of loans borrowers could take out and
require the lenders to offer affordable repayment options.
The Treasury Department is also pushing an alternative to payday
lending. Its budget for fiscal 2017, unveiled Tuesday, includes
funds to help community development financial institutions extend
small-dollar loans. The budget sets aside at least $10 million to
provide technical assistance and to cover potential loan losses
incurred by these lenders, which fund development projects in
financially struggling communities.
In recent years, banks, including Wells Fargo & Co. and U.S.
Bancorp stopped offering products similar to payday loans but with
somewhat lower interest rates. Their exit followed 2013 guidelines
issued by the Federal Deposit Insurance Corp. and the Office of the
Comptroller of the Currency that warned of risks but didn't ban the
loans outright.
Because the rule has yet to be formally proposed, spokesmen for
the FDIC and OCC declined to comment as did a spokesman for Wells
Fargo. U.S. Bancorp didn't respond to a request for comment.
The payday lending rule, expected to be formally proposed within
the next few months, represents the federal government's first
comprehensive attempt to curb payday lending, which can carry
annual interest rates exceeding 400%. While millions of Americans
lack access to bank accounts, payday customers—who pledge
repayments through automatic withdrawals on their paychecks—do have
regular bank accounts.
Mr. Cordray's comments are part of a CFPB effort to expand
financial services to lower-income consumers. On Feb. 3, the agency
asked banks to voluntarily offer low-cost, no-overdraft checking
accounts available to consumers to help bring them into the banking
system.
House Republicans, long critical of the CFPB, are scheduled to
grill a top agency official Thursday at a Financial Services
subcommittee hearing entitled, "Short-term, Small Dollar Lending:
The CFPB's Assault on Access to Credit and Trampling of State and
Tribal Sovereignty."
Banks and credit unions would be interested in offering such
loans to their customers, said David Pommerehn, vice president and
senior counsel at Consumer Bankers Association, a trade group of
retail banks. In order for the rule to work, he cautioned, it must
be easy to use so banks can issue loans quickly to meet consumers'
needs for emergency cash.
Mr. Pommerehn also urged bank regulators to forge a common
position. "First and foremost, the CFPB needs to understand that
whatever they do, it needs to be communicated and coordinated with
the prudential regulators," he said.
The payday industry doesn't see banks closing the gap for
low-income consumers if payday lending is greatly scaled back.
These businesses—check cashing, money transfer, remittance and
payday loans—"are inconsistent with current models of retail
banking that depend on streamlined self-service and electronic
transactions," said Dennis Shaul, chief executive of the Community
Financial Services Association of America, a trade group for payday
lenders.
Nick Bourke, who has studied the payday industry at Pew
Charitable Trusts, said such loans can be profitable for banks and
credit unions. "They already own the customer relationship. They
are much more efficient businesses with diverse product lines and
lower costs of funds" than payday lenders, he said.
Some credit unions currently offer low-dollar loans but tough
restrictions, including relatively low interest-rate caps, have
kept most from entering the market. According to Pew Charitable
Trusts, such loans represent less than 1% of the overall payday
market volume.
Regulators and industry officials recognize that many consumers
need short-term loans for emergencies. According to a recent survey
by Bankrate.com, only 37% of adults in the U.S. have the necessary
savings to cover a $500 car repair or a $1,000 emergency room
bill.
Write to Yuka Hayashi at yuka.hayashi@wsj.com
(END) Dow Jones Newswires
February 09, 2016 12:25 ET (17:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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