A recent piece in American Banker by the head of the Consumer Bankers Association (CBA) calls on federal regulators to take action that would allow banks to make small-dollar loans. The article points out recent steps taken by past OCC Comptroller Keith Noreika to revoke federal guidance that previously hindered banks from making loans and subsequent efforts to “clarify” the OCC’s support for bank offered small-dollar loans.
Clearly, we are seeing yet another effort by the federal government to encourage and assist banks in making small-dollar loans. The past two decades have seen a number of these government sponsored initiatives intended to encourage banks and credit unions to make small-dollar loans at rates that are less than it costs non-bank lenders to make similar loans.
Though these programs are ostensibly aimed at addressing the cycle-of-debt problem associated with payday and title loans, they often simply replace a payday company payday loan with a bank originated version of the same. After all a payday loan from a bank is still a payday loan, even if you call it a “deposit advance”.
Banks have a terrible record in this space – a high-profile program run by the Federal Deposit Insurance Corporation (FDIC) could only be run by participating banks at a loss and loan lengths imposed by the program meant that each loan ended up costing the borrower as much as a standard payday loan.
In their zeal to replace payday loans with subsidized bank versions, these programs ignore the fact that a viable small-dollar consumer finance alternative already exists in the form of traditional installment loans.
When they do attempt something like a safer installment loan, banks are unable to do so profitably. In fact, despite some muted claims of success, there is no evidence that any of these loan programs have been successful in balancing safety and affordability with a sustainable business model for either banks or credit unions.
So-called “payday alternative” loan programs often feature some form of tax-payer funded subsidy that allows banks and credit unions to offset their losses, subverting the market and putting non-bank lenders at a competitive disadvantage. This affects all forms of non-bank lending, including traditional installment loans, which are generally considered safer and more affordable than payday or title loans.
Though new programs like these raise concerns for short-term disruption of the small-dollar loan market, close industry observers have no concerns that, in the medium to long term, consumers will be able to avail themselves of a better alternative than viable and sustainable installment loans.
Nevertheless, we must question the wisdom of government and the banks making the same mistakes time and time again, particularly when installment lending offers a safe, affordable payday alternative in a model that has been sustained for generations.
