Regulations on short-term, small-dollar loan products should strive to balance access and consumer protection, Keith Sultemeier, president/CEO of Kinecta FCU and CUNA member, said during a Consumer Financial Protection (CFPB) field hearing Thursday. The CFPB conducted the hearing in conjunction with the Thursday release of its long-awaited proposed rule on short-term, small-dollar lending.
The rulemaking adds a number of restrictions on various payday, title, and certain high-cost installment loans. While the proposal potentially exempts several credit union products, CUNA is concerned that the exemptions might be difficult to achieve, and would therefore restrict consumer access to this type of credit.
“If responsible, well-regulated entities are not meeting the need [for short-term, small-dollar products], consumers will go elsewhere, but the need remains,” Sultemeier said. “Although we agree in principal with the proposed rule’s objectives, we expect it will be consistent with the bureau’s previous rulemakings, in that it increases our costs and/or decreases our revenue.
“When coupled with potentially lower interest income, increased credit risk and higher servicing costs, we fear that we may be reaching the point at which the credit union can no longer provide short-term, small-dollar credit and still be seen as a responsible steward of our members’ capital,” he added.
Sultemeier said his Manhattan Beach, Calif.-based credit union offers a number of short-term, small-dollar products as a member service. Setting up this loan program has been costly and time-consuming, he said, but the need for small-dollar loans in his community is overwhelming.
“Excessive regulation will eliminate the short-term, small-dollar loan, and it appears this proposal is headed in that direction. However, try as we may, we will not eliminate the need for these products,” Sultemeier said. “The right balance between access and consumer protection is one that encourages a healthy market for licensed and regulated providers, large and small, to compete. If we get it wrong, the alternative will see the need met by unlicensed, unregulated entities, and in this environment consumer protections will be few, if nonexistent.
“What’s troubling to me is in none of these [payday lending studies conducted by the CFPB] do I see the voices of the most relevant participants in the industry. What do consumers suggest is the appropriate trade-off between access and consumer protection?” he said. “I suggest the next study focus on answering this question.”
One product offered by Kinecta limits the short-term loan to no more than 5% of the member’s income. Sultemeier said that although product has allowed Kinecta to develop sufficient loan revenue to cover variable costs, it costs the credit union money.
When Kinecta offered a Payday Alternative Loan (PAL), which is capped at 28% interest with application fees of no more than $20, it ended up losing roughly $21 for each of the 1,920 loans granted.
While Sultemeier encouraged credit unions to start their own PAL programs, as theyhave been effective in other markets, the CFPB’s proposal would take away flexibility for Kinecta to offer a product more closely tailored to its community.