Small-dollar lending platforms have taken a bad rap in the last couple of decades. However, that reputation isn’t entirely unearned. Predatory lenders with usurious interest rates contribute more to vicious debt cycles than to the financial health of the borrowers they claim to serve.
Recently though, several financial regulatory bodies decided to revisit their strict stances on small-dollar loans. Part of their reconsidering is due to consumer groups pressuring them to reevaluate their positions on short-term lending; they’ve also noticed that small-dollar lending platforms are useful and, in many cases, very necessary services.
So, what does this mean for credit unions who are in or are interested in joining the small-dollar lending marketplace?
How We Got Here
The payday lending industry grew to fill a hole left by financial institutions. In order to counteract the considerable risk and cost of underwriting and funding quick loans, the payday lending industry compensated with extraordinarily high interest rates.
Many payday lenders charge rates well in excess of 300%, which is injurious to borrowers. Consequently, regulatory agencies sought to strictly regulate the industry. Public opinion of small-dollar loans plummeted.
People Still Have Emergencies
While many of the rules and bodies governing the deployment of small-dollar loan programs aimed to rein in predatory lending, it did so at the expense of responsible lenders. Especially among middle- and lower-income Americans, there still exists a need for emergency solvency in times of personal financial crisis.
After several years of discussion, regulatory agencies are reversing some of their more draconian regulations addressing the quick loan industry. As they do so, larger, more reputable financial institutions are entering the marketplace. They’re looking offer necessary services to people in need of money without preying on them during their most vulnerable moments.
Among the agencies revisiting their stricter policies regarding small-dollar lending programs are:
- The CFPB: The Consumer Financial Protection Bureau
- The OCC: The Office of the Comptroller of the Currency
- The NCUA: The National Credit Union Association
- The FDIC: The Federal Deposit Insurance Corporation
What this means for credit unions is that while regulatory change is sure to come, it looks favorable for the future of small-dollar loan programs. Credit unions who value member financial health over the opportunity to increase their margin are well-poised to offer critical short-term lending services to their members.
Are Quick Loan Platforms Viable?
There are several options when it comes to offering small-dollar loans to your credit union’s members. With modern technology, lending platforms can automate some or all of the underwriting process, drastically reducing the time and effort needed by credit unions to review and approve loans.
Similarly, with platforms like QCash, members can enjoy an approved and funded loan within a minute of applying for it. Small-dollar loan programs today can help credit union members during financially-trying times while also increasing their margin, all with minimal effort.
Best of all, by providing short-term lending services, credit unions can protect their members from payday lending interest rates that frequently exceed 10–20x what credit unions would charge.
What to Look For
The FDIC is opening up a comment period on the way they should handle small-dollar loan programs in January. If your credit union operates or is interested in offering a quick loan program, then now’s a good time to keep an eye on your news feed.
If you’d like to learn more about how credit unions can easily implement small-dollar loan programs, follow the links below. Or, if you’d like to see how small-dollar loans can benefit your members when they need it most, download our Member Crisis Guide.
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