ABA Carves Irresponsible Path Toward Small Dollar Bank Lending
The American Bankers Association (ABA) recently published a report, titled “Small Dollar Credit, Millions of Small Needs Add Up to a Big Deal: Banks Should Be Allowed to Offer Customers Multiple Choices,” detailing the potential entry of banks into small dollar lending. Currently, American banks issue about $9 trillion in loans each year and provide accounts to around 93% of American households.
Despite such an enormous reach, banking institutions are severely curtailed by government regulation in their ability to issue short term, small dollar loans similar to the products offered by NAFSA member tribal lending entities (TLEs). The ABA report includes a number of reasons for banks entering the short term credit sector and recommendations to ease entry.
First, the ABA puts forth the altruistic desire to protect consumers from “informal” credit sources. Informal credit typically comes from unlicensed, underground lenders commonly referred to as loan sharks. Although most closely associated in past decades with mafia crime syndicates, loan sharks come in many forms and continue to have a steady grip in certain areas of subprime lending. While loan sharking remains somewhat prevalent in American society, few local and state jurisdictions have prosecuted such usury violations with much gusto. Considering the fact that many consumers of small dollar credit products exist precisely because banks refuse to service their needs, it is difficult to tell if the limited presence of small dollar bank products would help eradicate the harmful effects of loan sharking.
Next, the ABA report touched on the array of small dollar credit products and services already offered by banks as a way to demonstrate their familiarity with the market. In fact, banks are heavy hitters in alternative finance, including subprime credit cards and overdraft protections, and already make considerable profits with those products and services. In 2015, American banks raked in $32.5 billion in overdraft fees from account holders, despite the fact that most bank customers never asked for overdraft protection and would prefer to be denied a transaction rather than incur the fee. Annual percentage rate (APR), the common metric used in the credit industry for usury regulation, can exceed 17,000% for overdraft fees. Many banks reorder daily customer transactions to maximize overdraft fees. Underserved credit customers do not need another entrant into the small dollar market with a history of dubious and unconscionable practices.
To achieve entrance into the small dollar credit market, the ABA recommends that the federal government essentially remove all of the regulatory protections originally legislated to shield consumers from unscrupulous and predatory bank loan practices in the first place. These barriers include a credit card rule that prevents banks from unilaterally and unforgivingly raising rates on customers, requirements that a consumer demonstrate their ability to repay prior to issuance of a loan, and agency guidance that forces banks to comply with credit risk standards when making Direct Deposit Advances to account holders. Total industry deregulation is not the answer to competitive market entry.
NAFSA TLEs have worked hard over the past five years to create and implement responsible and sustainable small dollar lending regulations while promoting financial literacy and economic development in tribal communities. Millions of Americans remain underserved by traditional bank services in times of household need. It would be irresponsible to deregulate the banking sector and allow them to impose their history of injurious practices and quintuple digit APRs on vulnerable borrowers. If these are the types of choices banks wish to bring to small dollar borrowers, the industry is better off without them.
