“We should change the (banking) regulations so that these (poor) customers could stay in the financial mainstream and not leave banks where they already have accounts just to go borrow a few hundred dollars…

…The high rates and aggressive collection practices of payday lenders cause consumers to lose their bank accounts and sometimes to exit the formal banking system entirely. Well-structured small bank loans, repayable in installments, could prevent that….. If regulators do not require excessive underwriting and documentation procedures for loans that meet basic safety guidelines, origination costs will also be low. Losses on these loans are typically modest, because access to a customer’s checking account gives lenders strong collateral. Credit unions that have offered such services have written off between just 2 and 4 percent of their loans….. When discussing financial inclusion, it is tempting to focus on people who are not considered part of the financial mainstream. But most people who use fringe financial services actually are bank customers, and we should be devising ways for them to stay in the banking system rather than creating the risk that they might fall out. Banking services should be geared to their needs, and regulations should not render large groups of middle- to low-income customers as “too small to help.” If our banking system is going to become an inclusive one that works for everyone and not just the affluent, allowing banks to offer small installment credit would be a great place to start.”, Frederick Wherry, “Payday Loans Cost the Poor Billions, and There’s an Easy Fix”, The New York Times, October 29, 2015

“I agree 100% with Professor Wherry, but let’s be clear…it’s government bank regulators (including the Consumer Financial Protection Bureau) that have prohibited banks from offering these loans to poor Americans on much better terms (than payday lenders). That’s why it’s so dangerous for government regulators to prohibit any type of lending that banks and borrowers believe is in their mutual interest. (I am pro-life, but a good analogy is abortions. Make them illegal and many will still get done. Just in a very bad way.) The regulators can address the risk of any type of lending, by placing limits on it (as a percent of a bank’s assets or capital) and/or requiring more capital to be held against it and/or limiting its annual growth rate at individual banks.”,  Mike Perry, former Chairman and CEO, IndyMac Bank

The Opinion Pages

Payday Loans Cost the Poor Billions, and There’s an Easy Fix

By FREDERICK WHERRY

EVERY year, millions of Americans who need a short-term loan to repair a car, fly quickly to a sick relative’s bedside, or catch up on child care payments find themselves going to payday lenders, either online or through one of the thousands of payday-lending storefronts. These are not people without credit or steady jobs. They simply can’t borrow such small amounts through the traditional banking system.

What might start as a $500 lifeline can quickly become a heavy burden. Annual interest rates for payday loans typically run between 391 and 521 percent, according to the Center for Responsible Lending, and most people who use them end up paying more in fees over the course of the year than they originally received in credit. Nationally, borrowers spend roughly $8.7 billion per year on payday-loan fees.

The United States government could put billions of dollars back into the pockets of these consumers by fixing a small regulatory problem and allowing banks to get into the business of small loans.

Currently, the Office of the Comptroller of the Currency, which regulates banks, has such stringent underwriting standards that it costs more for banks to meet the paperwork-intensive requirements than they could reasonably charge for such small sums. Indeed, the regulations have in practice (though not in rule) banned banks from offering small credit to a broad range of people. Encouraging banks to lend small sums would benefit both banks and customers.

I am in the midst of conducting research in several parts of the country with low- and moderate-income households who live paycheck to paycheck. Some of them use credit to manage fluctuations in their budgets. And they are not the unbanked — a checking account and an income are both required to secure a payday loan.

We should change the regulations so that these customers could stay in the financial mainstream and not leave banks where they already have accounts just to go borrow a few hundred dollars. The high rates and aggressive collection practices of payday lenders cause consumers to lose their bank accounts and sometimes to exit the formal banking system entirely. Well-structured small bank loans, repayable in installments, could prevent that.

While these loans will never be a big part of banks’ revenue compared with mortgages and credit cards, some banks are interested in offering them. A federal regulatory framework issued by the Consumer Financial Protection Bureau this year provides an initial pathway for banks to issue loans with payments limited to an affordable 5 percent of monthly income. Some credit unions already make such loans and a survey by the Pew Charitable Trusts estimates that a $500 loan made to a typical borrower would cost about $250 in finance charges over six months. The same loan from a payday lender typically costs well over $1,000.

So far policy makers have proposed a much more complex way to address this: Let the Postal Service do it. Senator Elizabeth Warren, Democrat of Massachusetts, proposed that the post office offer low-cost financial services like small loans to compete with payday lenders, with banks supplying help on the back end. It would be “the public option” for small-scale finance, but it would require that a new infrastructure of services be built and new skills acquired. Even if the Postal Service idea could be implemented without a technological glitch, the idea has already run into political opposition.

Banks are in a stronger position both to address emergency needs quickly and to achieve scale in the business. There are nearly 100,000 bank branches in the United States, and most banks could lend to their customers through their websites, mobile platforms, A.T.M.s or automated phone systems. That would help keep down the overhead costs that are the main driver of high payday loan prices. If regulators do not require excessive underwriting and documentation procedures for loans that meet basic safety guidelines, origination costs will also be low. Losses on these loans are typically modest, because access to a customer’s checking account gives lenders strong collateral. Credit unions that have offered such services have written off between just 2 and 4 percent of their loans.

By contrast, the post office does not have easy access to a person’s financial history, the ability to see whether there might be the resources available to repay the loan or the wide range of platforms already available for customers to apply for and receive a loan.

When discussing financial inclusion, it is tempting to focus on people who are not considered part of the financial mainstream. But most people who use fringe financial services actually are bank customers, and we should be devising ways for them to stay in the banking system rather than creating the risk that they might fall out. Banking services should be geared to their needs, and regulations should not render large groups of middle- to low-income customers as “too small to help.” If our banking system is going to become an inclusive one that works for everyone and not just the affluent, allowing banks to offer small installment credit would be a great place to start.

Frederick Wherry is a professor of sociology at Yale University and the author of “The Culture of Markets.”

A version of this op-ed appears in print on October 29, 2015, on page A31 of the New York edition with the headline: Failing the ‘Too Small to Help’.

Posted on October 30, 2015, in Postings. Bookmark the permalink. Leave a comment.

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