In opposing efforts by federal and state lawmakers to impose rate caps on small loans, industry representatives have pointed to the harm a rate cap can create for consumers, especially those with credit is not perfect, reducing access to credit. These concerns are often dismissed by consumer advocates with the argument that banks and credit unions will increase their small dollar loans if other providers exit the market due to interest rate caps.
A recently published report by the Government Accountability Office titled “Banking services: Regulators have taken steps to increase access, but measuring the effectiveness of the measures could be improvedstrongly suggests that banks and credit unions are unlikely to increase their small-value lending, as consumer advocates claim. GAO released the report in response to a request to examine factors affecting household access to basic banking services.
Among the services examined by the GAO in the report is small dollar lending. In a section titled “Market participants and observers have indicated that regulatory uncertainty surrounding the availability of small loans,” the GAO reports that banks and credit unions are not significant providers of small loans. amount. With regard to banks, the GAO reports:
Most market participants and observers who commented on the regulatory uncertainty surrounding small-value loans told us that banks were hesitant to offer such loans in part because of changes in related rules or guidelines in recent years. . In particular, some market participants and observers have noted that banks are unwilling to offer low-value products because they are expensive to develop and regulations or supervisory expectations may change.
The GAO notes that the basis of regulatory uncertainty on which it has received comment is the numerous issuances and cancellations of guidelines and other agency actions involving small dollar lending by the CFPB and federal banking agencies. The GAO says that from 2010 through 2020, the CFPB, Federal Reserve, FDIC, and OCC issued or canceled at least 19 small-loan related actions, including rules and policy statements.
Regarding small dollar lending by credit unions, the GAO reports:
[The National Credit Union Administration] established a rule in 2010 to provide a regulatory framework for federal credit unions offering small amount short-term loans. The Alternative Payday Loans (ALL) Rule I allows a federal credit union to offer its members a small dollar loan at a higher interest rate than allowed for other credit union loans, provided the loans meet certain duration, amount and fee requirements. . In October 2020, the NCUA released its PALs II rule to provide federal credit unions with additional flexibility to offer PALs to new members and increased the maximum loan amount to $2,000. … [M]Most credit unions haven’t made these small dollar loans since the 2010 NCUA rule…. »