In this four-part series, Andrew Morrison, a NILA member from Sun Loan Company, deliberates on wrong-footed policymaking, unintended consequences and the importance of safe, affordable small-dollar credit…..
PART 3: IT’S THE PRODUCT NOT THE PROVIDER
If rate caps are clearly the most bizarre and illogical intrusion by policy makers into the world of Small Dollar Credit, the runner-up must be the tendency to believe that they can solve the presumed problem by leaning on banks to make these loans.
This is a holdover from the days when ignorant policy makers divided the financial world into two, banks and “non-banks,” and assumed the former were all good and the latter all bad (cue howls of laughter from customers of Wells Fargo). There was even a term, “underbanked,” which assumed that the solution for what ailed lower income consumers was to get more services from a bank. Significantly, CFSI, which used to hold the annual “Unbanked and Underbanked” Conference, changed the name a few years ago, recognizing that it was misleading and insulting to both the consumers and the providers of those “alternative” financial services.
When banks have entered this space, they have tended to do so with what is essentially a payday product: the “deposit advance” is payable in one lump sum and the underwriting consists of having the same access to the borrower’s accounts as a payday ACH. This is clearly not a good solution for the consumer, and the practice was effectively banned under the last Administration.
The last time policy makers leaned on banks to make subprime consumer loans, against the banks’ own better judgment, the result was the collapse of the mortgage market and the resulting financial crisis. That was clearly a bad idea for banks, their depositors, and the taxpayers who had to pick up the pieces.
In the wake of the financial crisis, the FDIC, which was led at the time by a former Democratic Party functionary rather than a bank examiner, again asked banks to experiment with making small consumer installment loans at 36%. The result, with not one bank able to report a profit on the pilot program, should have led to an end to such nonsense. The failure of the FDIC pilot program and the collapse of ShoreBanks, the owner of CFSI, in 2010, should have been proof enough for even the most committed optimists, but apparently not. Like the proverbial bad penny, the idea keeps turning up.
It’s time to let commercial banks be commercial banks.Their skill set is suited to funding the community-based installment loan companies which know this space and are comfortable in it, providing high quality products to consumers, without risk to depositors or taxpayers.
And, while we are about it, let the Post Office stick to their skill set too. Seriously.