As I warned back in 2014, the President’s budget contains a clear sign that he would like to nationalize the small dollar lending market. It contains $10 million for a small dollar lending program to be administered by so-called Community Development Financial Institutions. This would be a taxpayer-funded, not taxpayer-backed system of small dollar loans.
Meanwhile, Consumer Financial Protection Bureau supremo Richard Cordray is urging banks to offer small dollar lending products of their own to compete with payday lenders. This puts the CFPB on a collision course with more prudent financial regulators who warned banks to get out of that business in 2013. The prudential regulators recognize that small dollar loans come with significant risk, which is why payday lenders charge large fees to cover the risk of non-repayment.
The Bureau is also recommending that banks get out of the overdraft business when offering checking accounts to “underbanked” consumers. Yet, as American Bankers Association vice president Wayne Abernathy notes, “Millions of bank customers rely upon overdrafts to meet their small dollar credit needs.”
These developments are happening at a time when many payday lenders, the prime source of small dollar loans besides overdrafts, have been deprived of banking services thanks to Operation Choke Point, where banking regulators and the Justice Department threatened banks that provided services to payday lenders and other businesses with heightened supervision and subpoenas.
Of course, the President’s budget has no chance of going through, so what is happening is that the administration is trying to kill the functional private market while attempting to spur a rival market that other regulators have tried to discourage in order to maintain bank financial health. This is the progressive vision, it seems.
Where this leaves the underbanked is anyone’s guess. Given that almost 4 in 10 Americans don’t have enough cash at hand to cover a $500 car repair bill, the only likely result is yet more financial hardship for those who struggle to get by. No wonder the blue collar demographic is in near open revolt against the system.