In opposing efforts by federal and state lawmakers to impose rate caps on small-dollar loans, industry representatives have pointed out the harm that a rate cap can create for consumers, particularly those with less than perfect credit, by reducing access to credit.  These concerns are often dismissed by consumer advocates with the argument that banks and credit unions will increase their small-dollar lending if other providers leave the market due to interest rate caps.

A report recently issued by the Government Accountability Office titled “Banking Services: Regulators Have Taken Actions to Increase Access, but Measurement of Actions’ Effectiveness Could Be Improved,” strongly suggests that banks and credit unions are unlikely to increase their small-dollar lending as consumer advocates contend.  The GAO issued the report in response to a request that it examine factors affecting household access to basic banking services.

Among the services examined by the GAO in the report is small-dollar lending.  In a section titled “Market Participants and Observers Indicated That Regulatory Uncertainty around Small-Dollar Lending Affected Availability,”  the GAO reports that banks and credit unions are not significant providers of small-dollar loans.  With respect to banks, the GAO reports:

Most of the market participants and observers who commented on regulatory uncertainty around small-dollar loans told us banks are hesitant to offer such loans in part because of changes to related rules or guidance 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 the regulations or supervisory expectations may change.

The GAO notes that the basis for the regulatory uncertainty on which it received comments is the numerous issuances and rescissions of guidance and other agency actions involving small-dollar lending by the CFPB and federal banking agencies.  The GAO states that from 2010 through 2020, the CFPB, Federal Reserve, FDIC, and OCC have issued or rescinded at least 19 actions related to small-dollar loans, including rulemakings and policy statements.

With respect to small-dollar lending by credit unions, the GAO reports:

[The National Credit Union Administration] established a rule in 2010 to provide a regulatory framework for federal credit unions offering short term, small-dollar loans.  The Payday Alternative Loans (PALs) I rule permits a federal credit union to offer its members a small-dollar loan at a higher interest rate than is permitted for other credit union loans as long as the loans meet certain term, amount, and fee requirements.  In October 2020, NCUA issued its PALs II rule to provide federal credit unions additional flexibility to offer PALs to new members and increased the maximum loan amount to $2,000. … [M]ost credit unions have not issued these small-dollar loans since NCUA’s 2010 rule….”