Nonprime lending isn’t as risky as it’s made out to be, and fintech firms can help traditional banks.
This month the Consumer Financial Protection Bureau issued new rules likely to curtail payday and title loans. On the same day, the Office of the Comptroller of the Currency removed its ban on short-term subprime lending by banks. Now some banks are sorting through ways to help meet demand for these loans.
These changes come amid turbulent times for millions of Americans. Average savings have dropped to less than 5% of income today from around 13% in the 1970s, according to the U.S. Bureau of Economic Analysis. A 2016 Federal Reserve report estimates nearly half of Americans would not be able to muster $400 for an emergency. Making matters worse, according to the Brookings Institution, income volatility has risen 30% since 1971. Access to credit has become an essential tool for millions of people dealing with unexpected expenses and income shortfalls.
Banks have also undergone dramatic changes. Automated credit scoring systems have replaced local loan officers, who once made credit decisions based on bank statements, income assessments, community connections and character. These technologies penalize those without pristine credit histories. Regulatory pressures have made the situation worse, forcing banks to curtail lending to the people most in need of it while battling for the relatively small pool of affluent customers.
To regain the trust and business of working-class Americans, bankers and their regulators must encourage innovations that help the underserved. With new leadership coming to the federal banking agencies, we offer five important insights:
• America is a nonprime nation. An astounding two-thirds of Americans have a nonprime credit score (below 700) or no score at all, according to the Corporation for Enterprise Development and FICO. Due to high credit-score requirements, some 160 million Americans find it difficult or impossible to access traditional bank credit. The way for banks to grow and better serve their communities is to figure out how to lend again, safely and profitably, to a much broader range of customers. Banks need a new generation of nonprime credit products.