WASHINGTON–The Pew Charitable Trusts consumer finance project has published “Affordable Credit Poised to Save Consumers Billions,” which it said offers updated standards that can “help banks and credit unions expand access to safe small loans.”
According to Pew Trusts, the issue brief looks at the state of bank-issued small loans, explores the regulatory history that has driven their growth, and provides more detail on these updated standards to help more financial institutions begin offering safe, affordable small loans that promote borrower success.
More Borrowers
“The growth of small dollar loans by banks and credit unions means that more borrowers with limited or no credit history have been able to borrow funds quickly to cover urgent expenses and avoid more costly alternatives such as payday, rent-to-own, or other high-cost lenders.,” Pew Trusts stated. “Ultimately, these new bank loans will especially help the most underserved consumers—particularly people who have no credit history or who are Black, Hispanic, immigrants, or under age 30—because they use high-cost, nonbank financial services and overdraft at disproportionately high rates.”
75% of Big Banks Have Offering
According to the Pew Trusts analysis, as of April 2023, six of the eight largest U.S. banks by branch count, which collectively operate 23% of all bank branches, had rolled out small installment loans or lines of credit that cost at least 15 times less than average payday loans.
Numerous smaller banks and credit unions also launched similar products in 2022, often with the assistance of technology vendors, and adoption at smaller institutions is increasing, Pew Trusts said.
Help from a PAL
The analysis noted credit unions participating in NCUA’s Payday Alternative Loan program set a record for new loan volume, reaching an all-time high with $227 million originated in 2022, eclipsing the previous mark of $174 million set in 2019.
“The first requirement to access these small credit products is having an account and transaction history at the bank or credit union issuing the loan, and more Americans than ever before—95.5% of households—meet those criteria,” Pew Trusts said. “That includes everyone who uses payday loans, which require borrowers to have a checking account. This means tens of millions of people whose credit scores have previously excluded them from bank or credit union loans could soon have access to an affordable small-dollar credit product so long as their financial institution decides to offer one.”
Updated Standards
Pew Trusts said that in light of the dramatic expansion of bank and credit union small lending since 2018, it examined the latest consumer and market research and updated its 2018 standards as follows:
- Access. “Credit should be available to existing bank and credit union customers who need the most help, are able to repay, and do not qualify for other loans.”
- Affordability. “Loans and lines of credit should offer enough time to repay, usually at least three months, so that each installment consumes only a small share of a borrower’s income.”
- Fair Pricing. “The total cost of the loan should be only a small fraction of the loan’s principal but be sufficient to ensure the bank can provide widespread access to small credit. Banks and credit unions making these loans readily available have been able to strike that balance successfully with fee-inclusive annual percentage rates in the mid-double digits or lower.”
- Speed. “Application processes should be fast and easy, leveraging online and mobile banking technologies, and funds should be provided the same day.”
What’s Discussed
Pew Trusts said the brief discusses the state of bank-issued small loans, explores the regulatory history that has driven their growth, and provides more detail on these updated standards to help more financial institutions begin offering safe, affordable small loans that promote borrower success.
The new brief can be viewed here.
Feeling the FOMO Fever? CUToday.info Has a Prescription
Are you missing out on the latest news in credit unions? Missing the trends and developments you need to be aware of? We can help. Each morning CUToday.info delivers its daily Fresh Today news update offering the latest headlines and breaking news right to your email, with the easy-to-read headlines format allowing you to click on the stories that interest you most in order to learn more.
And it’s free!
If you haven’t yet signed up for the new email solution on which CUToday.info has partnered with ResponseGenius, you can do so here. Signing up requires less than one minute of your time—and it’s free!
Please note that after signing up you may need to go to your Spam/Junk folder and mark the morning headlines email as safe. CUToday.info does not provide its list of readers and emails to outside parties, and we will not be contacting you to sell you an extended warranty or sending you any links so you may cash in on an inheritance you didn’t know was coming.
And did we mention it’s free?
Please note and/or make your IT department or email administrator aware the emails will be coming from the domains CUTodayinfo.com and CUTodayinfoReply.com.