It’s not news – it’s more like sadly predictable – that the Consumer Financial Protection Bureau is preparing more rules aimed at putting the online lending industry out of business.
The rules, which would require lenders to prove to the government’s satisfaction that their customers were able to repay, are yet another attempt to finish the job Operation Choke Point and other administration attempts at harassment have failed to do.
{mosads}But what is somewhat new is the administration and the bureau have realized and are now acknowledging online lending thrives for a reason. And that reason is that 34 million people – most of them low- to moderate-income Americans, predominately women and many members of other ethnic groups the administration purports to want to help – actively need these services.
According to a recent survey by Bankrate.com, only 37 percent of adults in the U.S. have enough in savings to cover a $500 car repair or a $1,000 emergency room bill.
Banks won’t lend to most of the rest of those people because they have little or no credit history and incomes below $50,000. An increasing number don’t even have accounts with traditional banks because they can’t afford the increases in fees and overdraft charges allowed under the Dodd-Frank financial reform legislation.
Online lenders have figured out a way to lend money, get 80 percent of it back on time and more than 95 percent eventually, do $38.5 billion worth of business per year and survive on profits roughly half that of regular banks – all while serving the riskiest credit customers around.
And the administration just can’t stand it. So, as it prepares the regulations to make it impossible for online lenders to survive, it also is rolling out measures to increase public-sector involvement in small-dollar loans.
There is, of course, the proposal by Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) to have post offices offer banking services, including loans that would be guaranteed by the government.
And there’s the Treasury Department pushing a measure to help community development financial institutions extend small-dollar loans. Its budget, released this week, calls for at least $10 million to provide technical assistance and to cover potential loan losses incurred by these lenders, which fund development projects in financially struggling communities.
And there’s the Consumer Financial Protection Bureau urging banks and credit unions to find ways to meet the needs of small-dollar borrowers and to offer low-cost, no-overdraft checking accounts to lure the unbanked back into the system.
Banking regulators have been telling banks to avoid small-dollar consumer lending, so much so that Wells Fargo and U.S. Bancorp stopped offering products similar to payday loans.
But Richard Cordray, the illegally appointed head of the Consumer Financial Protection Bureau, said he “personally believe(s) banks and credit unions can be low-cost providers of small-dollar loans” and that there “should be an ability for them to offer decent products.”
Obviously, 34 million people think online lenders are offering decent products. Which raises the question of why government can’t just let the private enterprises that are meeting these needs continue to do so.
But another question is why the federal government is weighing in at all on small-dollar lending. Why are these not state-level questions?
That’s what Greg Zoeller wants to know. Zoeller is the attorney general of Indiana, and he told Congress this week his state has gone to great lengths to craft regulations that balance the need for access to small-dollar loans against the need to restrict unsavory lenders.
Testifying at a subcommittee hearing of the House Financial Services Committee convened by Chairman Randy Neugebauer (R-Texas), and entitlted, “Short-term Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty,” Zoeller said the proposed federal regulations would destroy that balance.
“The regulatory framework proposed by the Bureau is extraordinarily broad,” Zoeller said. “It covers not only payday loans, but short- and medium-term loans which can be made by community banks and credit unions as a service to customers.”
Without this legitimate source of short-term lending, he said, “Consumers who need these types of funds will be forced to turn elsewhere… likely to unscrupulous lenders where they are at higher risk for abuse.”
Neugebauer is to be commended for shining light on this issue. This attempted power grab of market share by the Consumer Financial Protection Agency is unprecedented, unnecessary and unwise.
This goes beyond keeping Americans safe from disreputable lenders or even the unfortunately common use of government incentives and disincentives to pick economic winners and losers.
This is a blatant attempt to harass an industry out of business so it can be replaced with a more favored industry and a significant government presence. And not just any industry but one depended on by the struggling families the administration claims to want to help.
Banks and credit unions should be wary of falling in behind this move. What the government is trying to do to the online lending industry, it easily could do to them as well.
McNicoll is a conservative columnist and freelance writer based in Alexandria, Va. He is a former senior writer for The Heritage Foundation and former director of communications for the House Committee on Oversight and Government Reform.