I disagree with “the small-dollar credit problem” as presented by Raj Date, former deputy director of the Consumer Financial Protection Bureau, who believes that banks can develop a better, cheaper alternative to the traditional payday loan.
Since 1997, my company has provided financial services, including payday loans, to the underbanked. We have seen dozens of financial institutions, including startups, nonprofits, banks and credit unions, enter the short-term lending space. These firms decry the payday loan product while attempting to introduce a cheaper substitute, only to close their doors months later or eliminate the product from their portfolios. The federal government, specifically the Federal Deposit Insurance Corp., conducted what many, including myself, consider to be failed experiment in the short-term lending space when it introduced the Small-Dollar Loan Pilot Program in 2008. The program required participating banks to offer short-term loans at a rate of 36%. An analysis from the Financial Service Centers of America, Inc. shows the program to be unprofitable and unsustainable.
The effort to create low-cost consumer credit is certainly a worthy one. But, as the banks participating in the FDIC’s pilot program learned, pricing must reflect the realities of the marketplace as well as the mitigation of risk to capital. Like every other corner of a free market economy, if prices were excessive, new entrants would crowd into the market at lower price points.
As the debate surrounding the cost of credit products continues, we can’t ignore the fact that onerous regulations will only drive up pricing. This becomes particularly concerning as lenders face dueling mandates from regulators. For example, regulators want lenders to conduct more underwriting, and, at the same time, they want lenders to make more loans. Date seems to understand the complexities of doing that. As he explained in his remarks at the recent Underbanked Financial Services Forum, it costs a bank $700 to underwrite a $500 loan. So why offer the loan?
We can agree that better data and a continuous focus on our customers’ ability to repay may help improve existing products. However, it will not replace payday loans or reduce consumer demand for them. Instead of replacing products, why don’t we welcome competition and let the market (i.e. consumers) decide what works best?
We need an assortment of short-term credit products from various lenders – banks and nonbanks alike – to serve consumers. Overregulation and elimination of alternatives will merely set consumers back, particularly when criticism of existing products comes with no new solutions.
Ted Saunders is CEO of Community Choice Financial , which provides financial services, including payday loans, to consumers.