GAO’s Household Access to Banking Report Finds Limited Availability of Small Loans from Banks and Credit Unions | Ballard Spahr LLP


In contrast to efforts by federal and state lawmakers to introduce interest rate caps on small loans, industry officials have pointed out the damage an interest rate cap can do to consumers, particularly those with less than perfect credit, by restricting access to credit. These concerns are often dismissed by consumer advocates with the argument that banks and credit unions will increase their small lending if other providers exit the market due to interest rate caps.

A recent report issued by the Government Accountability Office entitled “Banking services: Regulators have taken steps to improve access, but measuring the effectiveness of the steps could be improved‘ strongly suggests that banks and credit unions are unlikely to increase their small lending, consumer advocates claim. GAO issued the report in response to a request to examine factors affecting households’ access to basic banking services.

Among the services GAO examined in the report is microcredit. In a section titled “Market Participants and Observers Pointed Out that Regulatory Uncertainties Relating to Small Credit Affect Availability,” GAO reports that banks and credit unions are not major providers of small credit. Regarding banks, GAO reports:

Most market participants and observers who commented on the regulatory uncertainty surrounding small loans told us that banks are reluctant to offer such loans, in part due to changes in related regulations or guidelines in recent years. In particular, some market participants and observers noted that banks do not want to offer small-dollar products because they are expensive to develop and regulations or regulatory expectations can change.

GAO notes that the basis for the regulatory uncertainty it received comments on is the numerous issuances and retractions of guidance and other regulatory actions related to small dollar lending by the CFPB and federal bank agencies. GAO states that from 2010 through 2020, the CFPB, Federal Reserve, FDIC, and OCC issued or vacated at least 19 lawsuits related to small loans, including rulemakings and policy statements.

Regarding small loans by credit unions, GAO reports:

[The National Credit Union Administration] introduced a rule in 2010 to create a regulatory framework for federal credit unions that offer short-term small loans. The Payday Alternative Loans (PALs) I Rule allows a federal credit union to offer its members a small dollar loan at a higher interest rate than is allowed on other credit union loans, so long as the loans meet certain term, amount, and fee requirements. In October 2020, the NCUA enacted its PALs II rule to give federal credit unions additional flexibility to offer PALs to new members and increased the maximum loan amount to $2,000. … [M]Most credit unions have stopped making these small loans since the 2010 NCUA rule…”

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