BankThink: The little-noticed power grab in regulators’ small-dollar guidance
By Karen Petrou
Last week, I awakened to a first: an ad on Washington’s all-news station touting pawnbrokers. A surer sign of the times is harder to find, reaffirming the importance of providing stressed families with short-term financing alternatives. Relief has come in the wake of the new interagency statement on “responsible” payday lending. The four federal financial agencies last month released new guidance meant to create a uniform framework for banks and credit unions on how to offer small-dollar consumer loans without raising regulatory red flags. However, this guidance comes with a kicker: banks may make short-term, small-dollar loans only with pricing that “reflects overall returns reasonably related to the financial institution’s product risks and costs.” This may seem a sensible bar to predatory pricing, but it’s also a precedent-setting intrusion by regulators into governing what “reasonable” is when it comes to profit. The concept of “just pricing” is a time-honored one perhaps most effectively espoused by Pope Francis. It has also gotten considerable play as the “just capital” movement advanced. However, it’s more than unusual to see an express regulatory demand that banks earn not what they can, but what they should.