A “New Era” in Short-Term Lending
Last week, at the urging of the Office of the Comptroller of the Currency (OCC), U.S. Bank became the first major bank to reenter the short-term, small-dollar lending space with its Simple Loan. The announcement was heralded for providing a “more trustworthy, transparent” credit option than the short-term, small-dollar loans offered by regulated, non-bank lenders like Advance America. In the American Banker, the Pew Charitable Trusts’ Nick Bourke went so far as to laud the move as the “start of a new era,” calling on all of the prudential banking regulators to take steps to offer similar short-term loans, even as the Bureau of Consumer Financial Protection (BCFP) prepares to effectively eliminate existing, competing non-bank options.
The Competitive Short-Term Loan Playing Field
Advance America welcomes the reentry of the banks into the short-term lending space; we’ve always known that our competitors include banks just as much as other companies in the retail lending space. Our customers – hardworking Americans – face very real economic challenges, from the difficulty of covering unexpected expenses to simply managing their cash flow and financial obligations. They benefit most when they can compare a variety of credit options and choose the one that makes the most sense for their personal economic situation.
In fact, Advance America has sought to facilitate consumers’ side-by-side comparison of their options by being a leader in disclosure, transparency and cost-effectiveness. And we have a proven track record: even on the most uneven of regulatory playing fields, consumers continue to choose non-bank lenders over banks, credit unions, fintech providers, and other options touted by those who oppose the non-bank lending industry – preferring the simplicity, convenience, and customer service.
Supported by a thorough underwriting process, a detailed compliance framework designed in accordance with dozens of state and federal laws, and disclosure practices that embody simplicity and transparency, regulated non-bank short-term loans will remain a valued credit solution for millions of Americans.
A number of banks, alongside credit unions, have offered short-term loans before. Even before the federal regulators issued guidance discouraging such lending, many of these traditional financial service providers quit the field, finding the loans to be unprofitable, particularly when compared to the overdraft programs, which generate $34 billion annually. Meanwhile, 94 percent of non-bank loan borrowers consider obtaining a loan from a non-bank lender to be a sensible decision.
The Path Forward
Federal and state regulators have an opportunity to ensure this more diverse short-term, small-dollar lending market works for consumers, from innovative approaches to disclosure to ambitious, collaborative, and coordinated regulation. The opportunity to build a free, fair, and balanced credit market has almost never been greater, as the OCC, National Credit Union Administration (NCUA), Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Board assess their role in this marketplace, and the BCFP reevaluates its short-term, small-dollar lending rule.
Amid rapid technological advances, shifting attitudes towards financial services, and the emergence of new providers, regulatory changes are already underway. With an integrated approach to regulation across banks, credit unions, non-banks, and fintech startups, financial regulators can transform the financial services market so that it works for consumers and lenders alike, providing greater access to credit for Americans of all levels of creditworthiness, alongside critical consumer protections.
Through a new, equitable regulatory world order more oriented towards collaboration, regulators and the array of financial services providers would better help Americans access and navigate the evolving and competitive credit marketplace, today and in the future. With greater partnership, financial services providers from across the spectrum would provide more consistent, accessible, and transparent credit options – a continuum of credit options affording a smoother, more predictable path toward long-term savings and upward mobility. The continuum would begin by tapping into the favorable experience, strong relationships, and trust short-term loan borrowers build with non-bank lenders. As borrowers successfully repay loans and build credit history, they would unlock access to new, increasingly prime, credit options and long-term relationships with a variety of providers, including banks and credit unions.
At a BCFP symposium this past Monday on credit visibility, Acting Director Mick Mulvaney wasn’t far off the mark in noting that “Too many people do not have access to credit, too many people are living in the credit desert.” By building bridges between the different providers and credit products, more Americans would have access to the credit and other financial services essential for making ends meet and driving our economy.
Such cooperation may seem radical, perhaps unprecedented – a “new era” in consumer lending, even. It may also enable a financial services sector to finally fulfill its promise to American consumers.