By Ryan Donovan
Over the last few decades, the consumer need for short-term, small dollar-loans has attracted some unscrupulous lenders, primarily driven by profits, that have made already troubling financial situations worse.
The demand for this type of credit is very high – in recent years, upwards of 12 million consumers have sought it – but too often, these borrowers pay an extraordinary price for the speed, convenience, and anonymity provided by storefront and online payday lenders, title lenders, pawnbrokers, and check cashers instead of turning to highly regulated depository institutions.
The CFPB has proposed a rule that aims to curb the abuses in this market. If the proposal was tailored to address these abuses, credit unions would be at the front of the line supporting it. But the CFPB has missed the mark by proposing a new rule that, in its attempt to curtail predatory lenders, would limit credit availability from reputable lenders, such as credit unions, with a history of providing safe and affordable alternatives. The consumer-friendly nature of these loans is widely recognized by many state regulators, the NCUA, and even the CFPB itself.
A Perplexing Turn of Events
In what may be the most perplexing turn of events, the CFPB’s proposal – a 1,300-page document filled with convoluted twists – would actually make it easier for a consumer to get a loan from a pawnbroker than from a credit union.
The CFPB’s research on payday lending turned up no measurable evidence of abuse in the credit union space; its own consumer database contains only four complaints filed against credit unions in three years, representing 0.088% of all payday complaints filed. This is because credit unions, unlike for-profit lenders, put their member-owners first.
Given credit unions’ pro-consumer track record and because they are already subject to robust prudential regulation under federal and state laws, we think the Bureau should exercise its exemption authority to allow credit unions to continue to offer alternative consumer-friendly options as they have for more than 100 years. Then the Bureau can more aggressively work to eliminate the actual abuses in the small-dollar loan market.
Credit unions do not likely have the capacity to fill the hole in the market left by the predatory providers the Bureau pulls back, but if the Bureau does not tailor its regulation and allow credit unions to try to step in and help when possible, consumers could face reduced credit availability and even more abusive lending practices.
Need to See the Bigger Picture
Credit union intervention with distressed members needing small-dollar credit can eventually lead the members toward more mainstream products and services, or additional financial education resources, which is a major distinction from nonbank lenders.
If the CFPB looks at the bigger picture, the advantage consumers gain by working with their credit union and participating more fully in current credit union programs far outweighs any benefits of adding highly technical compliance burdens to already consumer-friendly services.
The Bureau does consumers no favors by making a product they need access to more difficult for credit unions to offer. That’s not consumer protection. It’s abandonment.
Ryan Donovan is chief advocacy officer with CUNA.