WASHINGTON–A March announcement by NCUA and four other federal regulators encouraging credit unions and banks to offer emergency small loans to struggling consumers during the coronavirus pandemic is a positive development, but could lead to some harmful loan products, according to Pew Trusts.
“The regulators can protect consumers both in this time of heightened economic vulnerability and over the long term by issuing clear guidance and strong, data-driven small-lending standards, such as those outlined in our research, for traditional financial institutions,” Pew Trusts said.
Clear Guidance Needed
The Pew analysis notes just one of the nation’s top 10 banks, U.S. Bank, currently makes a small installment loan available to its customers. The loan has a three-month term.
“Extensive research from The Pew Charitable Trusts has shown that banks can deliver significant savings to consumers by offering small installment loans and lines of credit at much lower prices than the high-cost, unaffordable loans their customers can access from nonbank providers such as payday, auto title, and similar lenders,” the organization said. “With clear guidance from regulators, banks would be able to profitably charge consumers six to eight times less than payday lenders do for the same size loans. According to national polling, 8 in 10 payday borrowers would prefer to get a loan from their bank or credit union if they were equally likely to be approved.”
The Pew analysis points out consumer advocates have expressed legitimate concerns that regulators may be opening the door to harmful products from banks, particularly what the statement referred to as “appropriately structured single payment loans.”
To help ensure that widely available small loans from banks and credit unions are sustainable and safe, Pew has published recommended lending standards (below) based on extensive consumer research and more than 100 discussions with bank and credit union executives, it said.
‘Little Margin for Error’
“If designed appropriately, with a minimum term of 45 days and simple automated underwriting standards similar to those described in the OCC’s 2018 bulletin, that direction could result in a large expansion of affordable installment credit from banks and save consumers billions of dollars annually,” Pew said. “As the coronavirus outbreak has made plain, a large share of Americans have little financial margin for error. Small installment loans from banks can help see them through tough times.”