For years, banks have been reluctant to offer small-dollar loans to low- and moderate-income people. A recent report from the GAO explains why: fear that such lending will be punished, not rewarded. According to the GAO, that fear has arisen from vague, volatile and inconsistent guidance from multiple federal agencies acting individually or in concert and a resulting concern that even a lending program lauded by one regulator one year could be penalized by that regulator or another the next.
The GAO details past efforts by the agencies and the CFPB to discourage such lending. Of equal importance, the GAO explains that even when one of those agencies decided to encourage some form of small-dollar lending, such action had little effect. Banks recognize, based on experience well documented in the report, that any favorable guidance could be rescinded, or that another agency might take a different, even contradictory view. The GAO further explains what bankers know and regulators often ignore: product development requires years to go from concept to viability, and thus banks are reluctant to invest time and resources in a product that could subsequently become disfavored. Today’s regulatory safe harbor could be next year’s squally sea.
We reprint this section of the GAO report below in its entirety. It is a must-read for anyone who cares about expanding credit availability.
As a side note, what makes the situation especially disconcerting is that Congress in the 2010 Dodd-Frank Act created a new consumer regulatory regime at least in part to prevent such an outcome. Specifically, Congress created the CFPB and endowed it with sole authority to administer the nation’s core federal consumer financial protection laws. All regulatory, interpretive, examination and enforcement authority for those laws was explicitly transferred from the banking agencies to the CFPB for all banks with assets greater than $10 billion. Nonetheless, the banking agencies continue to regulate, interpret, examine and enforce the transferred consumer laws as if the legislation had not been enacted, seemingly nullifying Congress’ mandate.
Not surprisingly, then, post-2010, banks have been forced to the sidelines in this market, while payday lenders, pawn shops and other providers of high-cost credit have continued their business without meaningful interruption. The CFPB’s 2017 Payday Lending Rule imposed some restrictions on the payday loan industry, and the CFPB also has taken occasional enforcement actions against those lenders. But payday lenders and other non-banks do not face constant supervision and de facto product approval requirements imposed on banks; they do not worry that they will see their examination ratings downgraded and their growth curtailed. They survive and advance.
To be sure, a few larger banks have commendably launched small-dollar lending programs, but the terms of those programs are narrowly defined and were the product of extensive and lengthy pre-negotiation with the relevant agencies; at BPI, we spent over a year negotiating a safe harbor for one type of small-dollar loan. This is not a scalable model: there is no room for innovation, and most banks do not have the resources to run a complex and lengthy regulatory and political gauntlet to get a program approved.
There is a clear way out of this modern-day Babel and its sad consequences for low- and moderate-income Americans looking for short-term, small-dollar loans. Congress should conduct oversight hearings and insist that the CFPB prohibit by notice-and-comment regulation any small-dollar lending practices it determines to be unfair or abusive but otherwise allow banks to innovate and expand their small-dollar offerings. The banking agencies should accept the CFPB’s consumer protection role and acknowledge that small-dollar loans to low- and moderate-income people do not present any material risk to a diversified bank and therefore are not a safety and soundness concern. (If there is any doubt, they should establish by regulation a safe harbor for programs that put only an immaterial percentage of the bank’s capital at risk.)
These steps would unlock credit for tens of millions of deserving Americans. Banks would be no less safe, and the only losers would be the companies offering high-cost credit in the shadows of regulation.
Here follows the relevant section of the GAO report. The full report, which also looks at regulatory impediments to other banking products, is accessible here: https://www.gao.gov/products/gao-22-104468.
 12 U.S.C. § 5581 et seq. (“All consumer financial protection functions of the Comptroller of the Currency are transferred to the Bureau.”) (parallel language for other banking agencies). The Dodd-Frank Act further granted the Bureau “exclusive authority to require reports and conduct examinations” over the consumer protection laws for insured depository institutions with over $10 billion in assets. 12 U.S.C. § 5515. The federal banking agencies retained that authority only for banks with $10 billion or less in total assets. 12 U.S.C. § 5516.