The free market is supposed to be based on consumers being able to freely participate in it along with healthy competition. Notice we said “supposed to be.” Yes, our free market system is still chugging away, but it could stand to have a few swift kicks to get moving as it ought to be. According to information released from the FDIC, about 92 million Americans are either underbanked or unbanked entirely. Some of these consumers don’t have access to lines of credit, and may not even have the financial savvy it takes to find viable options to credit. While all of this is going on, it seems that regulators are having a field day; making it even more difficult for financial service providers to offer alternative services to people and for consumers to get access to much-needed loans. Many small lending companies are the only providers that some consumers have access to or are willing to do business with. Regulations that may very well shut down the small consumer lending business may well help to make competition virtually non-existent and may actually work to lower consumer participation rates.
Even former regulators understand that sweeping changes to the small dollar lending industry is going to cause problems for many consumers. The people that utilize these types of financial products don’t need lines of credit for tens of thousands of dollars. No, these are the consumers who need a hundred dollars or maybe a few hundred in order to repair their car or to take care of emergency medical costs. The traditional banks are simply not willing to offer the types of smaller dollar, shorter term loans that people need for these kinds of expenses, which leaves millions of Americans scrambling for help when emergency expenses arise.
Back in 2008, only around 30 banks offered consumer loans for less than $2,500. Since then, larger banks, like U.S. Bank and Wells Fargo have stopped their lines of small dollar loans because of all the new regulatory pressures that lenders must deal with. Since that happened, the situation for unbanked/underbanked consumers has gone downhill fast. Consider the fact that 54 percent of African Americans are currently underbanked/unbanked. Some of these folks run into brick walls when they need to get access to fast money for emergency expenses, but don’t have the options that many other Americans enjoy. Because many unbanked people have poor credit histories, they have no choice but to seek out alternative financial service providers. It is either that, or they have to take their luck with selling belongings, or worse yet, dealing with loan sharks.
Every consumer, including the unbanked and underbanked, need to have access to small dollar loans. And the lenders that provide these types of financial services need to do business in a way that allows them the ability to be profitable and successful. Upcoming small dollar consumer loan regulations may take away the ability for some of the most underserved financial participants in this country to gain access to emergency funds. And the regulations may drive legitimate lending operations completely out of business.
More than a few former financial regulators and watchdog group members have chimed in on this subject, with many of them saying that the proposed regulations coming down the pipeline are sure to spell financial disaster for many underbanked/unbanked households in this country. These warnings seem to be going completely unnoticed, as the Obama administration continues to utilize resources, like the CFPB, to put undue pressure and scrutiny on both small dollar lending companies and the people who depend on these types of loans to survive.
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