Readers of the American Banker know that I am very concerned that regulators at the Consumer Financial Protection Bureau might inadvertently strangle the small-dollar, payday loan market, destroying a lifeline of credit for millions of responsible, low- and middle-income Americans. CFPB Director Richard Cordray, whom I respect and believe wants sincerely to keep small-dollar credit available, would do well to have his staff talk with researchers at the Urban Institute.

The institute’s recent study, “Small-Dollar Credit: Protecting Consumers and Fostering Innovation” (December 2015), is the latest in an intelligent series of published roundtable discussions about what researchers and regulators know — and do not know — about small-dollar credit. The authors of the study (Signe-Mary McKernan, Caroline Ratcliffe, and Caleb Quakenbush) point out that most research on small-dollar loans focuses on consumers’ needs and behaviors, but is quite light, at best, on the needs and behaviors of lenders.

Yet, without a better understanding of providers’ business models, profitability, loss rates, volume and overhead costs, regulators cannot possibly create a product that ensures consumers get the credit they need and deserve. The first protection a consumer needs is the assurance that any new reforms will not inadvertently drive all regulated credit from the market. No lenders, no credit. Or worse, as the authors note, consumers will be forced to find other, far more harmful products.

The authors note that most research suggests the overwhelming majority of borrowers need credit because of a family emergency; a temporary, unexpected cash shortfall; or an occasional manageable gap between paychecks. Right now most of these consumers are getting credit when they need it. Regulators must be careful that they do not destroy this supply of credit while trying to help the much smaller percentage of borrowers who probably should not be getting credit at all.

To this end, the authors offer some suggestions.
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