Push for Comprehensive Guidance on Small Dollar Lending
Surveys continue to show that adults have little in the way of savings and would need to borrow money on a short-term basis in order to handle small, around $400, unexpected expenses. For some time now, the needs for small, short-term lending have been met by payday lending operations. Surprisingly, bigger banks have decided to move into this area. Maybe it’s time for smaller banks to do this as well?
The almost half a trillion-dollar U.S. Bank introduced a “Simple Loan” program late last year which grants 3-month loans of up to $1,000 to existing customers. The costs to the borrower are prohibitive, with an APR of over 70%. Current proposed legislation seeks to limit consumer loans to 36%. Organizations such as the Independent Community Bankers of America (ICBA) insist this is a need that smaller banks can meet, but not if they’re too restricted.
Instead, the ICBA wants regulators to not impose such limits and to provide better guidance in regards to offering small-dollar loans. Both the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation (FDIC) have issued statements to encourage “responsible, prudently underwritten credit products to consumers” but little detail besides that. The FDIC even left itself open for feedback from community banks concerning what guidance they could provide. Although it’s unlikely to become a substantial part of any smaller bank’s portfolio, small lending is a potentially lucrative prospect and would help keep customers who need such services engaged with the bank rather than going elsewhere. Depending on how the legislation goes and what the regulatory bodies may do to encourage such lending, this could be something to pursue.