Regulators urge banks and credit unions to consider offering low-value loans – consumer advocates call ‘terrible idea’

0
35

Regulators are pushing for banks, credit unions and savings associations to offer consumers and small businesses low-value loans to help offset the financial burden caused by the national coronavirus emergency. But consumer advocates say the loans could “trap people in a cycle of repeated borrowing and crushing debt.”

The Board of Governors of the Federal Reserve System, the Office of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency issued a joint letter encouraging banks and credit unions provide small loans to their customers.

Don’t miss:How to get help paying your mortgage, credit card bills, and student loans if you’re laid off due to the coronavirus pandemic

“Responsible small dollar loans can play an important role in meeting the credit needs of customers due to temporary cash flow imbalances, unforeseen expenses or income disruptions during times of economic stress or disaster recovery,” said writes the agencies in the letter.

The letter comes after a record 3.28 million Americans filed for unemployment benefits last week as businesses shut their doors in the wake of the coronavirus pandemic, laying off or laying off millions of people. people.

Regulators said the loans could include open-ended lines of credit, closed installment loans or “appropriately structured” single payment loans.


Consumer advocates have warned that these small loans could look like payday loans with high interest rates that have proven to trap people in cycles of debt.

“Loans should be offered in a way that offers fair treatment to consumers, complies with applicable laws and regulations and is consistent with safe and sound practices,” the agencies said.

Regulators also said banks and credit unions should consider working with consumers and businesses who can’t repay loans as structured to find ways to repay the principal without needing to borrow another loan. .

But consumer advocates have warned that these small loans could look like payday loans with high interest rates that have proven to trap people in cycles of debt. A group of advocacy organizations, including the Center for Responsible Lending, the Consumer Federation of America, the NAACP and the National Consumer Law Center, issued a joint statement saying that banking regulators “have opened the door for banks to exploit people, rather than to help them. “

“Essential consumer protection measures are missing from this guidance,” the organizations wrote. “By saying nothing about the damage caused by high interest loans, regulators are allowing banks to charge exorbitant prices when people in need can least afford it.”

Consumer groups have also argued that banks should not charge interest rates on small loans above 36% when financial institutions themselves have access to interest-free loans from the federal government. The statement said consumer groups “will watch whether banks offer loans that help or loans that hurt.”

The Federal Reserve and the National Credit Union Administration declined to comment on the statement by consumer advocates. Other regulators did not immediately return MarketWatch’s requests for comment.

Business groups have argued that their industries will be able to support consumers throughout the coronavirus outbreak. “Emergencies like the COVID-19 pandemic arise when the not-for-profit model of credit unions is fully displayed,” Jim Nussle, president and CEO of the Credit Union National Association, said in an email . “We have a long tradition of responding to our members in times of emergency, providing short-term, low-interest, no-interest loans to help people get through such uncertain times. “

Consumer Bankers Association President and CEO Richard Hunt noted in a statement that previous guidance from regulators “has cut the ability of banks to provide customers with short-term liquidity.”

“The flexibility given by regulators, combined with their statement today, will help banks adapt more easily to meet consumer demands,” Hunt said. A spokesperson for the Consumer Bankers Association added that small loans would be subject to the same regulations as other banking products.

Earlier this month, banking regulators announced they would account for lending and retail banking activities aimed at helping low- and moderate-income people, small businesses and smallholdings during the COVID outbreak. 19 to meet the objectives of banks under the Community Reinvestment Act.

Other financial regulators have also taken steps to help consumers during the coronavirus outbreak. The Federal Housing Finance Agency, for example, ordered Fannie Mae FNMA,
-1.45%
and Freddie Mac FMCC,
-1.64%
order mortgage agents to grant a 12-month forbearance on home loans to borrowers who have encountered financial difficulties due to the national emergency.

Read more: Equifax says it will work with lenders and creditors to help reduce impact of coronavirus crisis on U.S. credit reports

This story has been updated.