William Isaac: Payday Crackdown Creates More Problems than It Solves

By William M. Isaac, a former chairman of the Federal Deposit Insurance Corp. and the chairman of Fifth Third Bancorp.

February 18, 2014

American Banker

There are more payday loan stores in the U.S. than all the McDonald's and Starbucks stores combined. It's clear that tens of millions of consumers across the nation want and feel they need this product. It's equally clear that government policymakers believe they know what's best for consumers.

Recent actions taken by the federal government to eliminate a variety of short-term loan products suggest a strong bias against all such loans—period. If so, regulators need to reconsider before they destroy a critical source of credit for families and the economy as a whole.

I want to make a couple of things clear before proceeding. Until April when I reach mandatory board retirement age, I am chairman of Fifth Third Bancorp, which is one of four large banking companies to recently abandon very popular short-term lending products in response to regulatory pressure. Also, my consulting firm has done regulatory compliance work for one or more payday lending firms. I'm not speaking for those companies.

My motivation is to help millions of unbanked and underbanked individuals gain or maintain access to short-term credit on the best possible terms to meet emergency needs through reputable financial institutions. This is a subject I have written about for over a decade.

Recent actions by the Comptroller of the Currency essentially eliminated unsecured short-term consumer loans at national banks. The Department of Justice's "Operation Choke Point" attempts to prevent banks from lending to certain online lenders. The Consumer Financial Protection Bureau is apparently gearing up to take action against online lenders.

All of this is happening by regulatory fiat against activity that's clearly legal under federal and state laws without any involvement from the legislative branch of government and without explanation of the end game. How will consumers access much needed short-term credit? What are the rules and who will determine them?

Short-term consumer loans to borrowers without good credit histories can now be provided by only nonbank financial institutions. Before regulators go any further, they should open a public dialogue to make sure they don't do a lot more harm by eliminating the few lenders that remain.

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