February 3, 2020 at 5:00 am ET
The vast majority of Americans live paycheck to paycheck, and that’s a big part of why 60 million Americans lack good credit. As a result, they can’t obtain the same rates on loans that people with prime credit qualify for.
For banks, serving the credit-challenged is a difficult business. Given the pressure banks face to maintain low risk profiles, banks have historically shied away from serving this higher-risk consumer market, forcing people to turn to payday and auto title lenders who charge 400 percent or more in interest.
This has created a major gap in access to small dollar loans between those with good credit and those without. For the latter part of the population, lack of access has led to a catch-22 because it limits their ability to build back credit to reenter the ranks of prime.
We have seen progress in the past few years. U.S. Bank, one of the country’s largest banks, launched a $1,000 installment product with an APR of approximately 80 percent that can help bridge the divide. This brought a bank-offered alternative for customers who previously relied on payday loans, auto title loans or bank overdraft fees to fund unexpected expenses. Several state-chartered, FDIC-insured banks followed with national lending programs, but lacking the scale and resources of U.S. Bank, they have partnered with fintech platforms to outsource marketing and servicing.
These products have helped wean sub-620 FICO borrowers off of predatory lenders. However, despite strong reception from customers, several pundits have criticized bank-fintech partnerships because the loans that originated exceed some state-wide APR caps — even when the rates are lower than payday products.
For example, California recently amended the California Finance Lender’s Law that limits the rate of interest to 36% plus federal funds rate (~2%) per annum for consumer installment loans. Unfortunately, while the cap sought to help consumers by curbing predatory lending, the law instead severely limits access to credit by also preventing socially responsible, state-licensed companies from filling the void. This, in turn, effectively shuts the credit-challenged consumer out of the mainstream financial system.
The law that sought to protect consumers now makes matters worse.
However, banks that lend to consumers in California are not subject to this cap due to federal law that preempts state law. This is now a source of some criticism. But, without delving too deeply into a debate over federalism, nationally chartered and state-chartered banks are federally regulated (by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, respectively), and since the Carter Administration, these banks have been able to offer their rates across state lines regardless of restrictions another state might have.
Former FDIC Chairman William Isaac recently wrote that federal regulators have repeatedly been clear on this issue. Isaac also voiced his support for the underlying rationale of federal law by stating it “makes sense in today’s technology-driven world where most people get loans online rather than in a physical bank branch” for national banks to seamlessly service customers across state lines.
Additionally, it’s worth noting that the federal rate cap preemption doesn’t just apply to bank partnerships and fintech companies. It also ensures the smooth transfer across state lines of products we don’t think twice about, such as the rates on credit cards.
Access to financial products is already sparse for the credit-challenged, and we need to talk about ways to make it better, not worse. For example, when potential customers reach out to my company, first we check a consortium of 15 other lenders offering APRs of less than 36 percent to see if the customer can qualify for a better rate. We find that only 7 percent qualify, leaving 93 percent without alternatives in the event of a hypothetical 36 percent rate cap.
We must find more ways, not less, to provide access to small-dollar credit before we cut off credit options completely. Yes, this includes common sense guardrails for consumer protection. But it’s imperative that we support fintech partnerships with mainstream financial providers who provide options to help people recover and rebuild their financial health.
Jared Kaplan is the chief executive officer of OppLoans, a leading financial technology platform that provides accessible products and a top-rated experience to middle income, credit-challenged consumers.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.