U.S. Treasury Provides Recommendations to Improve the Short-Term Lending Market

Over the last year and a half, the U.S. Treasury Department has been examining how U.S. financial regulations promote or inhibit a number of “core principles,” including “empower[ing] Americans to make independent financial decisions and informed choices in the marketplace” and “foster[ing] economy growth and vibrant financial markets.” In its latest report released last Tuesday, Treasury looks at non-bank financial institutions – and specifically, short-term, small-dollar lending – and financial innovation, perhaps without fully appreciating how intertwined its recommendations are.

Regulations should expand, not limit, credit options

The report recommends that the Bureau of Consumer Financial Protection’s (BCFP) short-term, small-dollar lending rule be rescinded, maintaining that the states already effectively regulate these loans and further oversight would restrict access to credit. Treasury calls on banking regulators to encourage banks to offer short-term, small-dollar installment loans.

With its recommendation, Treasury affirms consumers’ well-documented need for short-term credit and its critical role underpinning the U.S. economy. The substance of the Bureau’s short-term lending rule – along with the process used to develop it – reflects the influence of bias against non-bank, short-term lending with the apparent intention of eliminating a valued credit option for millions of Americans. The truth is that consumers need more financial options, not fewer. Enhancing their regulated credit choices to include short-term loans from both banks and non-banks will result in a competitive, thriving marketplace with benefits for borrowers and lenders alike.

Encouraging innovation, collaboration and credit access

In releasing the report, Treasury Secretary Steven Mnuchin said, “Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector." There is tremendous opportunity for innovation in short-term, small-dollar lending and its regulation, but as BCFP Acting Director Mick Mulvaney noted in a statement on the Treasury report, innovation starts with coordination and collaboration.

By taking an integrated approach to short-term lending regulation across banks, credit unions, non-banks and fintech startups, the short-term credit market can be transformed so that it works for consumers and lenders of all kinds. More collaborative regulation would help consumers navigate the evolving marketplace, successfully repay loans, build credit history and unlock access to new credit options and long-term relationships with a variety of providers.

A first step towards a more coordinated and collaborative regulatory framework for short-term lending might be in Treasury’s proposal for “regulatory sandboxes” – regulatory relief designed to “permit meaningful experimentation for innovative products, services, and processes” in financial services. The states have long served as the incubators for innovative short-term credit solutions and their regulation. A united effort at the state and federal levels would strengthen the American credit market and empower consumers with greater choice, providing clear pathways to greater creditworthiness and upward mobility alongside meaningful consumer protections.

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