Wednesday, August 31, 2011

Regulators and the Underbanked

What can banking industry regulators do about payday lending and other predatory products of so the called alternative financial service providers? In most States, not much, unfortunately. National regulators such as the Office of Controller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have no remit to regulate these non-bank purveyors of dubious financial services. The new Consumer Financial Protection Bureau which was established as part of the recent Dodd-Frank financial reform bill, can only act to control the payday lending industry with the approval of individual state regulatory entities.

With the economy continuing to linger in the doldrums of a jobless recovery, a majority of Americans appear unable to meet a $1,000 emergency expense. According to a recent report by the National Foundation for Credit Counseling only 36% of American households have the funds available to meeting an expense of this modest magnitude. No wonder the business of the payday lenders is booming and some commercial banks are beginning to offer their own payday-style products.

So-called “direct-deposit advance” loans are increasingly being used by low-income consumers with bank accounts linked to some form of direct deposit like a paycheck or social security benefit. Much like the payday loan, they are for a short duration and come with effective triple digit interest rates. Although they are less expensive than the typical payday loan, consumer advocates argue that they still lead to crippling dependency on debt. In fact, the Center for Responsible Lending urges regulators to immediately stop the banks they supervise from making such loans.

But would this really be helpful? After all, low income consumers do need the money and the bank product is arguably better than that offered by the alternative financial service providers. Would not such regulatory action simply drive these borrowers in greater number to the more predatory lenders. Instead of prohibiting banks from offering short-term, payday-style credit, why not require them to offer a product that meets the consumers’ needs and helps them to manage their debt needs responsibly?

Market purists would argue that banks should take such action on their own and this would be one more example of over intrusive government regulation. But the opportunity for short-term gain often trumps sound long-term corporate strategy. The subprime lending crisis that largely precipitated and certainly exacerbated the current economic crisis is ample evidence of this. And who would argue that stringent, government mandated warnings on the dangers smoking hasn’t induced large segments of the population to give up very harmful behavior?

In fact, regulators already have a tool, the Community Reinvestment Act, sufficient to encourage and reward banks for lending more responsibly to low income communities. As I reported in my previous blog post, Emerge Workplace Solutions, a for-profit social venture works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that help workers re-build rather than destroy their credit. And now Citibank is pioneering with the Center for Community Self-Help in developing a “Micro Branch” model to compete with payday lenders in low-income communities.

Until we can outlaw the underlying need in low income communities for short-term credit it makes no sense to prohibit mainstream banks from providing it. However, we can and must ensure that this need is met in a way that alleviates rather than causes greater poverty.


  1. Interesting post - and good information. Thank you. I was not aware of Emerge Workplace Solutions. It looks like a great idea, especially if people take advantage of the education and crisis financial counseling. I'm more skeptical of Citibank's micro-branch idea. I can't help but think they'd have an eye more to simply cashing in on a new area.
    I pastor a small church, and we are constantly getting requests from people in the community, as well as our church, for money to deal with emergencies. Some of these requests are to repay predatory loan companies! We've made the decision not to provide assistance when it will go to these loan-shark businesses because they are unethical.
    Traditionally, we've given assistance directly to power companies or to landlords, never providing cash to the individual. We haven't made loans. However I'm beginning to wonder if it would be better for churches in a community to band together - or work with a community credit union or financial non-profit - to use our "emergency assistance" funds in a more strategic way in our communities. Perhaps making low-interest emergency loans available. Some in our churches don't think "the Church" should be in the "business" of making loans with any interest, but so often we end up harming people by enabling them, instead of helping them to learn new ways of getting out of old problems. We've worked through a great book, "When Helping Hurts" put out by the Chalmers Institute ( Any guidance or thoughts you have for those in the faith community would be helpful.

  2. Dear Pastor Curtis,
    Thanks so much for your thoughtful comment on my blog and thank you for turning me on to "When Helping Hurts." I am working my way through it and may write about it in a later blog post. I can certainly understand your dilemma regarding helping those who have become trapped by the payday lenders and whether the church should be in the business of making loans with interest. There are rarely easy answers to such problems. Perhaps there is a way you and other faith-based organizations can "partner" with a non-profit such as Emerge or a credit union or other community oriented financial organization to help people meet financial emergencies or free themselves from predatory lenders. One thought is to use one of the on-line peer-to-peer lending platforms as a vehicle to make the loans with the church providing "credit enhancement" for specific borrowers. Perhaps the subject of another blog post.
    Many thanks again for your comment and may God bless your efforts.

  3. It is unbearable to realize the cost of living for poor is substantially higher than other income brackets because of late fees, deposit renewals, cut-off fees and predatory scenarios such as you describe in this article. Many cities and towns are quickly becoming third-world status but not because of economic hardships but because local cities and towns corruptions keep them there. (I cannot name my city for this reason!) Considering my city whose utility rates are three times the national average and without compassion for the consumer under a municipality without governance of higher authority. There are no extension fees or payment plans provided. No paid bill, no electric. They are strong-arming its citizens to place utility payments above all others. This causes them to drain the local community banks financial assistance dry as well as the local churches providing assistance to the needy. In addition, those churches helping fund those electric bills are not tax-exempt. To avoid people living within their means by simply living without electric (possible in this rural area) my city bundles the water and trash bill. No electricity service, no water to survive and if the tenant is persistent they can condemn the residents for not having trash service and evict unwanted poor struggling to survive under the weight of an administration who illegally taxes the utility rates. When I pay my bill I must roll out a read carpet and stave any disdain. I once purchased a business but they sabotaged it when I complained to the landlord of a leaky roof. Yet, the city utility manager has expressed her desire for me to leave town. Highly skilled persons are very poor in this town merely because the city does not want their services. Even obtaining reliable and affordable telephone service is difficult. The last time I begrudgingly decided to take my money local was for car insurance. She lied. I got stuck with the bill and the credit record for the bill she decided I should pay when I clearly stated otherwise. Now, I cannot afford car insurance. My credit is now ruined. The rates for car insurance are based upon credit scores regardless of driving records. If I am caught driving (to get groceries) without car insurance I can lose my driver's license and be fined thousands of dollars. However, riding a horse in town is not legal. I am criminalized for being poor. On many occasions my respect for the law has almost been diminished for this reason. My blatant attitude toward minor criminals has been relaxed. I'm one of them now. However, my city does have a brand spanking new police station going up across the street from my house. My property taxes tripled; improvements, right? I cannot establish a well based business without a reliable telephone. Never, in my life, had I ever dreamed I would see America turn into a third world country. Truly, people do not care about the poor unless they are children or are young. Too often are the parents immediately labeled as drug addicts, alcoholics, mentally ill or just downright lazy because they are poor. How large in numbers do the injustices need to rise before Americans take notice of the severity of corruption before they begin to put in place accountability measures? We just cannot survive with the enormous amount of corruption in every avenue of life. It's so difficult for me to wake up in the mornings knowing there will be no improvement today simply because someone else would not have it.