Regulators Look to Restrict Legal Small-dollar Credit; Consumers Look Elsewhere
As we continue to see signs of a financial services realm changing to fit the evolving needs and expectations of consumers, regulators and industry leaders must be ever-mindful of the risks and consequences of impractical, inequitable and inefficient regulation, as well as opportunities to foster rather than restrain consumer-friendly financial services.
In its research into the preferences of consumers, Bank of America learned something we at Advance America already know. To quote co-Chief Operating Officer David Darnell, “they want no surprises… and they’re comfortable with a flat, low monthly fee as long as that fee doesn’t fluctuate based on behavior.”
Simple, transparent fees are a motivating factor for many consumers, the very reason why so many choose non-bank options like the cash advance. The flat, one-time fee on our short-term loans – typically $15 per $100 borrowed – as well as our fully-disclosed terms differentiate our service.
But current actions by federal and state regulators suggest that this valued option and others like it may be in danger. In the last several months alone, the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have issued research and guidance regarding our cash advance service and comparable bank deposit advances. These actions indicate a growing inclination to further regulate and restrict consumer credit.
Such regulation has grave consequences for consumers. For instance, banks including Wells Fargo and U.S. Bancorp have indicated they would no longer be able to offer deposit advances under the OCC and FDIC’s proposed guidelines, leaving consumers with fewer credit options, according to a recent Wall Street Journal report.
Similarly, bank analyst Dick Bove warned that, “If banks are unable to make money available under this system because the CFPB mandates that they lose money on overdrafts, then the household loses access to this method of funding. The question is then where will the household get the money it needs to meet short-term obligations. The answer, of course, is through illegal lending operations aka the Mafia.”
In a recent interview with Bloomberg TV, CFPB Director Richard Cordray acknowledged the many costs and consequences associated with financial regulation, noting that it “needs to be reasonable, it needs to be evenhanded, it needs to be overseen in a sensible way.”
Advance America agrees that if we are to best serve American consumers, changes in the credit market are essential. Greater competition and innovation, coupled with a more streamlined, predictable financial services experience will bring about widespread economic benefits. But these changes require revisiting the regulatory framework, and that means actually implementing the type of reasonable, evenhanded, sensible regulation Director Cordray describes, which unfortunately is at odds with his agency’s recent actions.