When it comes to short-term, small-dollar loans, banks are between a rock and a hard place.
Consumers are demanding short-term credit, and officials such as former Consumer Financial Protection Bureau Director Richard Cordray have urged banks to meet this need. On the other hand, stringent regulation meant to shut down predatory lenders is understandably causing banks to hesitate about jumping into the market.
Many banks lack the technology to effectively underwrite these products. Partnerships with financial technology companies could be effective in helping banks meet both consumer and regulatory demands. But those partnerships continue to face a legal cloud. Thankfully Congress is considering adding a dose of needed clarity.
About 160 million Americans have nonprime credit scores or are credit invisible because they have no credit score at all. Most have incomes well above the poverty line, even above $100,000 a year, but they still cannot qualify for traditional loans. Lost jobs and mortgages in delinquency during the 2008-9 recession dented their credit scores. Or, take a recent college graduate with a bright career ahead but no credit history; he or she is not an attractive borrower to traditional creditors.
More Americans have incomes that swing month to month; coming up with even just $400 might be a challenge. Jobs tied to tourism, pay tied to tips or households where income earners may come and go all make for an uncertain income stream. Meanwhile, emergency expenses are a part of everyday life. Deposits for a first apartment, payments for higher education and moving costs require the same lump-sum payments as a medical emergency.
Americans need credit to smooth out the bumps in their financial and personal lives. But since the crisis, a lot of folks have had to fend for themselves. The Office of the Comptroller of the Currency recently spoke out on this problem: “As a practical matter, consumers who would prefer to rely on banks and thrifts for these products may be forced to rely on less regulated lenders and be exposed to the risk of consumer harm and expense.”