Advocates seek ‘unified voice’ from regulators on small loans


Almost 40% of American adults would either have to borrow or sell something to cover an unexpected expense of $ 400 or they would not be able to cover it, according to the Federal Reserve Board. U.S. Household Economic Well-Being Report, published in May.

This figure represents a modest improvement over data from the previous year, but it illustrates how a significant portion of the American population is struggling in the short term.

Advocates have pushed more banks to offer low-value loans as an alternative to predatory lending to which this cash-strapped demographic is often susceptible.

Regulators have been slow to offer advice to support banks wishing to enter the space, said Kate Hao, founder and CEO of Happy Mango, a fintech that helps banks and credit unions provide loans from low amount to people with tarnished or no credit history. .

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“Regulatory clarity and regulatory consistency is the first step that would make banks feel comfortable making these products,” said Hao, who traveled to Washington last month to meet with the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve on the matter. “When there is an inconsistency between the regulators’ approach to this product, they will raise questions.”

The Office of the Comptroller of the Currency (OCC) has issued a bulletin last year, encourage banks to consider offering small loans. American consumers borrow nearly $ 90 billion each year in loans typically ranging from $ 300 to $ 5,000, according to the agency. But as a number of banks have left this segment of the market, consumers in need often turn to alternative lenders.

Hao welcomed the OCC’s guidelines, but said most banks won’t accept small dollar loans until other regulators follow suit.

“Banks would like to see regulators provide something cohesive, a unified voice to provide direction in this space,” said Hao, whose company has helped financial institutions make loans to more than 1,000 people in the region. three New York states since its launch in 2016.

Happy Mango uses a cash flow-based credit score to determine an individual’s ability to make future payments. The platform also connects people to free financial advice and offers borrowers a flexible payment schedule.

Further advice

the FDIC issued a request for information on low-value loans in November, soliciting information on consumer demand and the supply of low-value credit products offered by banks.

The regulator also said it wanted to know what it could do to better enable banks to offer “responsible and prudently purchased credit products to consumers to meet demand.”

The National Credit Union Administration (NCUA) issued a proposal this would allow federally chartered credit unions to offer small installment loans of up to $ 2,000 with a maximum term of 12 months.

Indeed, one of the few major banks to have approached the low dollar lending space is the US Bank, which last fall launched its “Simple Loan” product. It allows existing customers to apply online for a small loan of up to $ 1,000, repayable over three months at an annual rate (APR) of 70% to 88%.

But APR has proven a sticking point.

Senator Dick Durbin, D-IL, introduced legislation in May to create a national interest rate cap of 36% on consumer loans, a limit The FDIC recommended.

But small financial institutions have expressed concern that this figure is not high enough. Rhonda Whitley, vice president and regulatory advisor to the Independent Community Bankers of America (ICBA), said her organization supports allowing banks to offer higher APRs.

“We would like to have some flexibility to provide products that exceed the 36% APR, but nothing unreasonable. It is so easy to achieve that 36% when you factor in all the costs associated with taking out that loan. , especially for a small loan. ”Whitley told Banking Dive.“ We are certainly not looking for new regulations, but we are looking for advice that supports the community banking platform and provides flexibility for community banks to continue. to provide service to their customers. ”

Mary Jackson, CEO of the Alliance of Online Lenders, said Durbin’s proposal would be “cataclysmic” for her industry.

“A rate cap basically tells people with poor credit that they won’t be able to get credit. It’s not a very good solution,” Jackson told Banking Dive. “It would be nice if lawmakers could respond to what consumers are really looking for.

Previous versions of the bill were proposed in 2008, 2009, 2012, 2013, 2015 and 2017, but were never presented to the House or Senate, according to Consumer finance monitor.

“If a big bank like the US Bank has determined that 88% is the number it needs to get the loan, then our lenders probably need to double or triple that number just because of the cost,” Jackson said.

‘Gray area’

The ICBA has said it wants regulators to promote community banks as a model for low dollar lenders.

“Community banks will not have a predatory lending program,” Whitley said. “They are not going to have a predatory loan product.”

While the advice needs to be tailored to the consumers who need it most, Whitley said there is also a need to consider the different charters and asset sizes of community banks.

“Community banks are not necessarily low-value lenders, but they do offer these products as a hosting loan to clients they have relationships with,” she said. “So low-value loans are generally not an advertised product within the community banking space.”

Whitley said she hoped any guidance issued by regulators would support innovation by promoting partnerships between community banks and fintech companies.

“There are a lot of gray areas when it comes to fintech and innovation with regulators,” Whitley said. “We would like to see them take the position of letting these institutions know that getting attached to a fantastic company to offer the use of solutions is not a scarlet letter and that they should not be afraid.”

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