The White House’s Latest Solution to a Non-Problem

President Obama is here to help small-dollar consumer lenders. How lucky for them! From yesterday’s American Banker:

Obama’s Final Budget Looks to
Spur Small-Dollar Lending

WASHINGTON—The Obama administration will take another crack at testing the viability of small-dollar loan products when it releases its proposed 2017 budget on Tuesday.

The White House and other Democrats have long pushed for banks to offer affordable small-dollar loans as an alternative to payday loans and other costlier credit, but banks have struggled to make them profitable and safe for consumers. . . .

“This year’s budget will propose a new small-dollar loan program to help CDFIs address the issue of predatory lending in their communities and provide an alternatiuve to payday lenders “ Treasury Secretary Jack Lew said in a speech last month, referring to community development financial institutions.  [Emph. added.]

So the government will step in and succeed where it deems private enterprise to have failed. What could go wrong? Demand for small-dollar loans among low-income consumers even exists, recall, because such consumers live from paycheck to paycheck and occasionally run into short-term financial emergencies (an unexpected car repair, say) and need extra short-term cash. So they’ll take out a small loan and repay it quickly, usually in a matter of weeks. It is an entirely legitimate—and much needed—financial service, and over the years the industry has come up with no shortage of solutions. There are payday loans, for instance, and overdraft checking services, and deposit advances. In every case, the product solves the consumer’s problem, at a price the consumer is willing to pay.

You’d think that would be the end of the story, that the White House’s budget process would stay out of the picture entirely, and that Jack Lew wouldn’t be prattling on about the need for an “alternative.” Wrong. Instead, the moral solons in the Democratic Party consider things like payday loans and deposit advances to be “predatory,” and want the government to get involved to find a different solution. In this latest iteration, the new scheme will apparently mandate interest-rate and loan-size and -duration caps, with the government funding some or all of lenders’ credit losses.

I just have one question: Have these people lost their minds? As it is, a private-sector solution to this particular financial need is already in place that is completely acceptable to all parties involved. You may object to the fees and interest rates that payday lenders charge their customers, but customers seem not to.  And the fact is that payday lenders don’t earn exorbitant profits. Their ROEs average around just low double digits–which means lenders have to charge what they charge in order to earn a reasonable profit. If it were possible to provide the same service at a lower price, some innovative player would have found it by now and pushed higher-priced competitors out of the market. No one has.

It gets worse. For now the government is apparently getting ready to tell low-income consumers that the very activity it discouraged them from engaging in in the past—the taking out of small-dollar, high interest loans—it is now willing to subsidize, via de facto loss guarantees to lenders. First, as a taxpayer why do I have to get involved? And second, has the government learned nothing from its forays into encouraging subprime borrowing?

Oh and one other thing: any proposed government-concocted small-dollar loan product isn’t likely to work. The feds have tried this before, after all. Back in 2009 Sheila Bair, then head of the FDIC, proposed that banks offer small-dollar loans with a maximum interest rate of 36%, a maximum size of $2,500, and minimum duration of three months. Thirty-one banks offered the product. It was a total bomb for the lenders.

This is all beyond preposterous. A fair and workable solution is already in place to the issue of small dollar loans. Leave it alone. The federal government—and taxpayer money—should stay out of the issue completely.

What do you think? Let me know!