Joseph Otting, Comptroller of the Currency, says that rules on short-term, small-dollar lending should be relaxed so U.S. banks are able to offer loans to cash-strapped consumers.
According to Financial Times, strict underwriting rules and the negative publicity surrounding loans with such high annual interest rates have caused banks to avoid providing these types of unsecured loans.
But research shows there is definitely a need for the financing. A survey last year by the Federal Reserve found that nearly half of American families do not have enough in savings to cover a $400 emergency expense, and would have to borrow or sell something in order to do so.
As a result, online lenders have flooded the market, some of them focusing on consumers with low credit scores or no scores at all.
While speaking at a conference hosted by the American Bankers Association on Wednesday (April 25), Otting said the restrictions should be relaxed so that U.S. banks can underwrite small-ticket loans, typically between $500 and $5,000, over periods of 45 and 90 days.
“If we can get people back into the regulated market, that will be better for them and the economy,” said Otting.
He offered few details of his plans, but explained that he wanted to encourage banks to offer installment loans rather than payday loans or deposit advances. With installment loans, borrowers make a series of fixed payments until the balance is repaid, with the lender charging interest instead of a one-time fee.
Todd Baker, a former banker now running the consulting firm Broadmoor, said that while small-dollar loans would not solve the bigger problem of low and irregular pay, consumers would generally be better protected from abusive and deceptive practices by taking out such a loan through a bank.
“Low-income people need liquidity,” he said. “It’s better when that happens within a regulated bank, [rather] than outside it.”