Shaul’s not a neutral party, of course. The industry he represents benefits from protecting payday lenders, whose profit model would be seriously hurt by a new regulation. But he’s not the only one with concerns about how short-term payday loan borrowers will cope once the market tightens.There are few places for poor, underbanked Americans to turn when they’re in need of a couple hundred dollars in a pinch. In the past, many traditional banks have said that the risk and cost of underwriting small-dollar loans simply isn’t worth it: Small loans, coupled with borrowers with low-incomes and spotty or nonexistent credit history, don’t really appeal to large, profit-seeking banks.
Payday lenders were able to fill that gap and turn a profit by charging high fees within truncated repayment periods. The fact that borrowers were typically those least able to repay under either of those conditions created insidious cycles of debt, in which a delinquent loan would lead to high fees and more loans, which would in turn lead to more debt. But in exchange for the exorbitant costs, borrowers got small amounts of money immediately—with few requirements. For many poor Americans, who have few resources in an emergency, the loans were often crucial.
One of the main alternatives provided by credit unions is the Payday Alternative Loan —which allows federally-backed credit unions to provide their members with small loans in amounts ranging from $200 to $1,000, with repayment terms of one to six months. But when you compare the accessibility of PAL loans to the demand for payday products, it’s clear that they can’t meet the need. In 2016, only about 20 percent of the country’s fewer than 4,000 federal credit unions offered the loans. And to get one, a borrower must be a member of a credit union for at least a month, and sometimes complete a financial-education requirement in order to fulfill a loan application. That’s an imperfect swap for many of the 12 million Americans who use payday loans each year to receive an instant cash infusion.
One possibility when it comes to curbing dangerous loans is having traditional institutions, such as banks and credit unions into the market provide more, and better alternatives. As Bourke and many others have noted, these operations are often flush enough to offer small-dollar loans at much cheaper prices than payday lenders—which often operated on very thin margins. But in order to do that, it these institutions would need to have an incentive, or at least clear rules about how to structure small-dollar loans without getting in trouble with regulators. “These aren’t money makers for credit unions,” Dan Berger, the CEO of the National Association of Federally-Insured Credit Unions (NAFCU), says about small-dollar loans. “It’s not that attractive.”
In order to get banks and credit unions on board, they will need to be able to process the loans quickly and cheaply—by automating their underwriting, for example. And to do that, they need clear rules about how federal regulators want the financial sector to deal with small-dollar loans. The CFPB kept their regulations very specific, so that they would target payday lenders but not prevent more traditional entities from making smaller loans. But the actual work of outlining how those loans might work falls to regulators outside of the CFPB such as the Federal Insurance Deposit Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA) (the agencies declined to comment about any forthcoming plans for small-dollar loan guidance).