Alternative lending could fill gap for consumer cash needs

During any recession, access to cash flow is most critical for consumers. When incomes are shrinking and jobs being lost, consumers often focus in on the immediate day-to-day needs. During the current COVID-19 pandemic, the industries hit the hardest – hospitality and retail – also have large employee bases that are often on the lower end of the economic scale without access to alternative credit or large savings and investment accounts.

And the need for access to credit is real. The Federal Reserve’s annual survey finds that 40 percent of Americans would not be able to cover a $400 emergency with cash, savings or a credit charge that could be quickly paid off.

Findings from a May survey commissioned by BAI and the National Foundation for Credit Counseling (NFCC) and conducted online by The Harris Poll found that the most reported personal finance concerns was not having enough “rainy day” savings for an emergency.

Complicating the stress is the original $600 Federal unemployment supplement ended July 31. President Donald Trump signed an executive order extending the supplement, but it is for a reduced amount of $400. At the same time, credit is tightening. The BAI and NFCC survey found that the proportion of consumers that that have applied for a new credit card in the last three months is significantly lower than the proportion who reported having applied for a new credit card prior to the COVID-19 pandemic.

Alternative lenders and money services can help fill this needed gap in cash flow, but these organizations must be careful to avoid predatory practices. Being a responsible alternative lender requires leaders at these organizations to understand how they can provide a service at a fair cost, know the compliance landscape and train staff that can support responsible growth and lower risk.

Small loans can make a difference

Five federal agencies — the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency — have issued a joint statement encouraging financial services organizations to “offer responsible small-dollar loans to consumers and small businesses in response to COVID-19.”

The regulators said that banks and other financial services organizations could structure these new loans in a variety of ways, including open-end lines of credit, installment loans paid back over a set duration or single payment loans.

The CFPB has also reversed proposed rules that alternative lender advocates claimed would have overly restricted their ability to serve consumers. The proposed rules would have limited how many loans borrowers could take in a row and required alternative lenders to verify that customers could repay the debt. The CFPB did keep in place provisions governing automatic deductions, disclosures and recordkeeping.

Unfortunately, due to the actions of a few, alternative lenders have also gained a reputation as unscrupulous and taking advantage of low-income consumers. To counter this reputation, alternative lending leaders need to be hyper-vigilant in complying with regulatory demands, since these organizations often have more scrutiny placed on them by the agencies.

At the federal level, leaders must ensure that their organization complies with the same regulations that govern any financial services organization:

  • Equal Credit Opportunity Act (ECOA) forbids discrimination against consumers based on sex, age, race, marital status, and other protected characteristics.
  • Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) forbids lying to or tricking consumers with misleading or inaccurate marketing or loan contracts.
  • Truth in Lending Act (TILA) requires lenders to provide certain disclosures to applicants that clearly spell out the terms of the loan and its costs.
  • Fair Credit Reporting Act (FCRA) places limitations on when and how a lender can use an applicant’s credit report.
  • Fair Debt Collection Practices Act (FDCPA) places limitations on debt collection efforts, including outlining the hours and methods companies can use to collect on debt.

In addition to the federal laws, alternative lender leaders should also be aware of the varying state laws that govern alternative lending. At the state level, additional regulations can include interest rate or fee limits and even outright bans on certain loan types.

The best way leaders can ensure their organization is responsibly serving their community is to build a strong training program for all employees. To do this, leaders need to build a standardized process for training.

The first step is to onboard new employees and cover compliance as a required part of training. Additionally, training should be updated and refreshed regularly to keep up with the dynamic regulatory environment.

Leaders can partner with non-profit organizations dedicated to training to ensure that all training programs are comprehensive and up to date. Taking the steps now to establish an effective training program can ensure your organization is positioned to help consumers meet their financial needs during the COVID-19 crisis while also lowering your organization’s risk of failing to comply with regulations.

Ed Marcheselli is a managing director at BAI.

Despite the revocation of changes to the CFPB’s federal rule governing payday lending, all payday lenders are required by the CFPB to provide compliance training. If you’re not compliant you could be subject to heavy fines. Read BAI’s special report to learn more.