There are more payday loan stores in the United States than all the McDonald’s and Starbucks stores combined. It is clear that tens of millions of consumers across the country want and feel they need this product. It is equally clear that government policy makers believe they know what is best for consumers.
Recent moves by the federal government to eliminate a variety of short-term loan products suggest a strong bias against all such loans ?? period. If so, regulators must reconsider their decision before destroying a critical source of credit for families and the economy as a whole.
I want to clarify some things before continuing. Until April, when I reach mandatory retirement age on the board of directors, I am chairman of Fifth Third Bancorp, one of the four big banking companies to have recently abandoned short-lending products. very popular term in response to regulatory pressure. In addition, my consulting firm has performed regulatory compliance work for one or more payday loan companies. I am not speaking on behalf of these companies.
My motivation is to help millions of unbanked and underbanked people obtain or maintain access to short-term credit on the best possible terms to meet emergency needs through reputable financial institutions. It’s a subject i wrote approximately for over a decade.
The recent actions of the Comptroller of the Currency have essentially eliminated unsecured short-term consumer loans at national banks. The Ministry of Justice “Operation Choke Point“attempts to prevent banks from lending to certain online lenders. The Consumer Financial Protection Bureau is apparently preparing to take action against online lenders.
All of this is happening by regulatory decree against an activity that is clearly legal under federal and state laws without any involvement from the legislative branch of government and without an explanation for the end of the game. How will consumers access short-term credit? that they need so badly? What are the rules and who will determine them?
Short-term consumer loans to borrowers with no credit history can now only be granted by non-bank financial institutions. Before regulators go any further, they should open a public dialogue to make sure they don’t do much more harm by eliminating the few lenders that remain.
Short-term, unsecured consumer loans to borrowers with poor or limited credit history are necessarily expensive. The millions of people who use these loans are not irrational. For borrowers, these loans are cheaper than a series of overdrafts. They are less painful than the consequences of defaulting on a car loan or mortgage. It’s a better deal than having the electricity and heat turned off only later to pay to turn them back on.
Research at Federal Reserve Banks of New York and Kansas City both show that states that phase out payday loans immediately experience a substantial increase in these costly outcomes. Significantly, these studies also reveal that more households file for bankruptcy when payday loans are no longer available.
Are borrowers deceived by the terms of their payday loans? Obviously, ensuring transparency to the borrower is essential, but research done at Columbia University indicates that most borrowers understand the terms of payday loans and are quite realistic about how many months it will take to repay the loans and at what cost.
Payday loans are heavily regulated by the states. Some states prohibit them. Other states regulate terms in various ways, including allowable amounts. It is not clear to me that we have done enough research to determine which model is better and whether borrowers will be better protected by a federal model compared to the many models used in the state lab.
Federal regulators have a role to play. Online lenders who avoid state law violate state law, and federal regulators could help enforce those laws. Federal regulators have long had the power to sanction false advertising, and they should continue to make loan terms transparent and understandable. Increased competition should keep lending as affordable as possible, and this is something federal bank regulators can and should promote.
It is important that the government proceed with caution and not take hasty action that would force millions of underbanked consumers to pay much more ?? not to mention unsavory and potentially dangerous ?? ways to meet their emergency financial needs. It is high time to have a good factual debate on how best to satisfy this glaring societal need, and then to encourage reputable and regulated institutions to deliver the goods at the lowest possible price.
It is easy for the government to just say “no” to payday loans. A more responsible course is to encourage reputable banking and non-banking institutions to develop and deliver quality services under the best possible conditions, coupled with advice to clients on how to better manage their finances and move to less solutions. expensive and longer term.
I am puzzled when I see the government forcing banks to withdraw from the legal activity of providing short term unsecured loans to meet emergency needs ?? tell the banks that this represents too much “reputational risk” ?? while encouraging banks to provide services to marijuana dealers whose operations clearly violate federal and nearly all state laws.
“More curious and more curious! Alice would proclaim.
William M. Isaac, former chairman of the Federal Deposit Insurance Corp., is global head of financial institutions for FTI Consulting, chairman of Fifth Third Bancorp and author of “Senseless Panic: How Washington Failed America”. The opinions expressed are his own.