Do Banks Have a Future in Small-Dollar Credit?

February 20, 2014
American Banker 
payday lending news
Under pressure from federal regulators, six financial institutions have scrapped a controversial credit product that they labeled as a "deposit advance" but that consumer advocates criticized as a "bank payday loan." Four of those banks, however, have vowed to develop alternative small-dollar loan options for customers.

Banks that want to compete with payday lenders for the business of low-income consumers with poor credit face several obstacles. Whatever new product the banks develop probably will not be as lucrative as the deposit advance. Under new guidance from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC), banks must underwrite a borrower's ability to repay the debt. As a result, unsecured loans likely will have longer terms and lower annual percentage rates.

Paul Leonard, West Coast director at the Center for Responsible Lending and a vocal critic of deposit advances, argues that banks should focus on more than the loan's profitability. If they build long-term relationships with customers, he says, the resulting brand loyalty will pay off over time. "It's not necessarily just about one single transaction," according to Leonard.

The market for small-dollar credit also could become more fragmented. Many borrowers lack the savings necessary to qualify for secured lending, and so it may make sense for them to consider a partnership with a nonbank. Banks also must use a lot of time and resources to build up a small-dollar loan program from scratch. They could instead partner with a nonbank that already has expertise in small-dollar lending. San Francisco-based LendUp, for instance, is preparing to announce partnerships with banks to provide small-dollar credit products.

Banks also face ongoing uncertainty about the regulatory landscape. There is a disconnect among the FDIC, the OCC, the Federal Reserve, and the Consumer Financial Protection Bureau over rules that apply to small-dollar loans.

Abstract News © Copyright 2008-2013 INFORMATION, INC.
Powered by Information, Inc.

Stay Updated

Join the fight against predatory lending. Enter your e-mail to sign up for breaking news, action alerts, and CRL's original research.

   Please leave this field empty

Help Us End Predatory Lending

Predatory lending destroys family wealth, and preys on our most vulnerable communities. You can help us end abusive lending practices by donating to CRL, or by sharing our work with others.