The Trump administration plans to loosen rules on short-term, small-dollar lending, paving the way for US banks to go after the business of tens of millions of American families struggling to make ends meet.
Banks have historically shied away from providing unsecured loans to cash-strapped consumers, complaining that tough rules on underwriting — and the negative publicity of providing loans with very high effective annual interest rates — made the business more trouble than it was worth.
But on Wednesday Joseph Otting, Comptroller of the Currency, said that standards should be relaxed to allow banks to underwrite small-ticket loans, typically of between $500 and $5,000, over periods of 45 and 90 days.
Lobby groups for the big banks have been calling for more flexibility from regulators, arguing that vulnerable consumers have been forced into a netherworld of payday lenders and pawnshops, which generally offer much lighter protections against abusive and predatory practices.
“If we can get people back into the regulated market, that will be better for them and the economy,” said Mr Otting, who was addressing a conference hosted by the American Bankers Association.
The move signals a shift from the previous administration, which in 2013 urged banks to scrap a form of short-term lending known as “deposit advances”, typically repaid in a lump sum through the borrower’s next pay cheque. Big regional banks such as US Bancorp, Regions Financial and Fifth Third had been particularly active.
Mr Otting, a former CEO of OneWest Bank and ally of Steven Mnuchin, the Treasury secretary, is the day-to-day regulator for national banks like Wells Fargo, Bank of America and JPMorgan Chase. He also sits on the board of the Federal Deposit Insurance Corporation (FDIC), another banking regulator, and is a voting member of the Financial Stability Oversight Council.
He offered few details of his plans on Wednesday, but stressed he wanted to encourage banks to offer instalment loans rather than payday loans or deposit advances. Under instalment loans, borrowers make a series of fixed payments until the balance is repaid. The lender charges interest rather than a one-time fee.
The market for unsecured consumer loans has grown rapidly in recent years, as wages have stagnated while one-off costs, such as medical bills, have climbed steadily higher. A survey last year by the Federal Reserve found that nearly half of American families could not cover a $400 emergency expense without borrowing or selling something to do so.
Online lenders have flooded into the area, some of them aiming at consumers with low credit scores or no scores at all. Some big employers have responded, too, offering ways to bridge gaps between income and expenses. Walmart, for example, has partnered with a fintech firm called PayActiv to allow its 1.4m US employees to tap wages they have earned but not yet been paid.
Todd Baker, a former banker now running Broadmoor, a consulting firm, said that small-dollar loans offered by banks would not solve the fundamental problem of low and irregular pay. But he said that consumers were generally better protected from abusive and deceptive practices, if they steered clear of cheque-cashers and liquor stores.
“Low-income people need liquidity,” he said. “It’s better that happens within a regulated bank, than outside it.”
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