Understanding the True Cost of Providing Credit to American Consumers

The Trump administration recently took positive, consumer-friendly steps to update U.S. banking laws that could expand credit to more Americans. It is refreshing to see the Department of Treasury, the Consumer Financial Protection Bureau and banking regulators recognize that consumers need more innovative credit options in the marketplace and that online lenders should be central to that goal.

But while the opportunity to grow access to credit is real, the threat to undermine it is as well if we fail to take a principles-based approach to crafting consumer lending policy. This means using fact-based, unbiased research that supports the growth of the financial services industry while appropriately protecting consumers from fraud and abuse and not limiting their access to credit.

The danger stems from policies that arbitrarily cap interest rates for consumer financial products. For example, a federal rate cap at 36 percent for personal loans would amount to a de facto redlining of 109 million individuals in the United States who are not able to access credit from traditional banks because they are considered too big a risk. Despite all of the laws in the United States that restrict discriminatory lending, capping rates is the only legal way to ensure that the majority of Americans lose access to credit.

For evidence of this one simply has to look at states that have decided to cap rates without considering how it will negatively impact consumers and limit access to credit.

After interest rate caps were imposed and certain short-term loans were banned in Georgia and North Carolina, consumers “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 bankruptcy at a higher rate,” according to the Federal Reserve.

Recent attempts by banks to enter into the market that many new and innovative online lenders serve has also failed. In 2008 the Federal Deposit Insurance Corp. piloted its Small Dollar Loan Program with rates capped at 36 percent as an alternative to other short-term lending options. The program proved to be largely unprofitable for banks, as most used the program to drive consumers into fee-based checking accounts where they could collect overdraft and insufficient fund fees. In the end banks determined a 36 percent rate cap on short-term, small dollar loans was unworkable.

Instead of focusing on arbitrary rate caps, policymakers should work on creative ways to expand access to credit.

A national bank charter for fintech companies could offer the right level of supervision and regulatory consistency to ensure nonprime customers are served appropriately and fairly.

But if we continue to get wrapped up in arbitrary numbers and rate caps on riskier loans, it is unclear if the charter could be a viable option for many online lenders serving the majority of Americans with non-prime credit.

The debate over the national charter has also sparked a conversation over how we can modernize the Community Reinvestment Act, which was passed not long after the first ATM machine was introduced and long before the internet and smartphones.

The CRA was designed to stop the systematic practice of denying loans to low- and moderate-income households.  But as the Treasury Department pointed out in a recent proposal, the law has not kept up with the substantial organizational and technological changes in the U.S. banking industry.  In recent years bank and fintech partnerships along with innovations in technology and lending, have allowed banks to identify and serve individuals that banks might not otherwise be able to identify.

Partnerships with fintech companies help banks evaluate, track and offer loans to those who need them.  New industry standards are also shining a light on bad actors and creating new opportunities for millions of Americans to access credit.

Without more research and analysis on the true cost of providing credit that reflects risk-based lending, and a smart principles-based approach, we run the risk of redlining the majority American families; their access to credit will be eliminated.  We look forward to working with federal and state regulators on creative ways to expand access to credit and to determine the true cost of providing it for Americans who need it.

Mary Jackson is the CEO of Online Lenders Alliance.

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