Banks Urged to Make Small Dollar Loans, but Remain Reluctant

In recent years, regulatory agencies under the Trump Administration have pressed credit unions and banks to offer more credit options for consumers, including small dollar loans. However, banks have remained concerned about the profitability of such small-dollar lending products and, as a result, are still reluctant to offer them.

“As quickly as these rules change, they can flip back, so for a bank to spend a lot of time and effort to create a product to fit this market and have the rules change a year from now, it’s hard to imagine they will do that work,” said Doug Farry, co-founder of Employee Loan Solutions, as reported by American Banker.

American Banker also reports that only a few banks offer well-known small-lending products, including U.S. Bank in Minneapolis and KeyBank in Cleveland.

Since the Supreme Court made it easier for the president to fire a Consumer Financial Protection Bureau (CFPB) Director, many banks are wary to start offering small-lending products, at least until the 2020 presidential election, which could cause a turnaround on regulatory policy.

“Banks want to serve their customers, but with uncertainty surrounding the Supreme Court ruling to create an at-will [CFPB] director during an election year, I would not expect many institutions to invest time and resources into a new product,” stated Richard Hunt, president and CEO of the Consumer Bankers Association.

The demand for small-dollar loans increased at the start of the COVID-19 pandemic, but banks have been reluctant to offer them; small-dollar loans are less profitable than the larger loans with a low chance of default that banks tend to focus on. If banks and credit unions start offering small-dollar loans, they will likely partner with fintechs and other companies that have already automated the process.