Uncertainty is Bad for Consumers
If there’s one area where folks of all stripes and political persuasions can agree, it’s that uncertainty, whether economic or employment, is uncomfortable and leaves individuals feeling vulnerable. Government policies can also play a role in creating uncertainty for consumers and businesses alike.
A good example of this is when policymakers impose interest rate caps on consumer loans that they claim will help consumers alleviate their financial concerns, when the opposite is true and safe, secure credit becomes more expensive or unavailable to those who need it most.
Over the past year, two states – Illinois and New Mexico – imposed a 36% rate cap on small dollar consumer loans. A year ago, when Illinois passed its rate cap, hundreds of reputable small dollar lenders left the state, leaving tens of thousands of consumers with less than perfect credit with no access to credit. In New Mexico a similar result is expected.
Consumer advocates argue – with no verifiable data to prove it – that banks and credit unions will step in to fill the void when reputable traditional installment lending companies are forced to leave a market. In fact, the opposite is true.
A Government Accountability Office (GAO) report released in February demonstrates that banks and credit unions don’t provide much access to small-dollar credit. The report, entitled Regulators Have Taken Actions to Increase Access, but Measurement of Actions’ Effectiveness Could Be Improved, is comprehensive, spanning over 90 pages. The GAO found that banks and credit unions are hesitant to enter the small dollar lending space because: (a) small-dollar loans are expensive to provide, and (b) the regulatory environment is too uncertain.
“Most of the market participants and observers who commented on regulatory uncertainty around small-dollar loans told us banks are hesitant to offer such loans in part because of changes to related rules or guidance in recent years. In particular some market participants and observers noted that banks do not want to offer small-dollar products because they are expensive to develop and the regulations or supervisory expectations may change.”
“With regard to federal credit unions, NCUA [National Credit Union Administration] established a rule in 2010 to provide a regulatory framework for federal credit unions offering short term, small-dollar loans. … Although most credit unions have not issued these small-dollar loans since NCUA’s 2010 rule, PALs [Payday Alternative Loans] credit risk has been comparable to credit risk from other loan types at most credit unions that issued PALs.” [Emphasis added]
We encourage AFSA members, policymakers, and other stakeholders to read the report.
April 4th, 2022 by Dan Bucherer