Banks have the tools to serve lower-income customers who are disproportionately impacted by predatory lending, said Federal Reserve Gov. Michelle Bowman on July 9.
Speaking at a finance conference in Washington, D.C., Bowman said small-dollar loans from banks often have safer terms and a lower cost than other types of loans.
“Some banks that offer small dollar loan products often use automated underwriting based on alternative information that can include consumer-permissioned cash-flow data,” Bowman said. “If used appropriately, this approach can reduce bank underwriting costs, potentially making affordably priced loans available to consumers on a more timely basis.
“If these loans were more available in the banking system, they could serve as an alternative to more costly options from alternative financial services providers. Small dollar loans targeted to low- and moderate-income consumers have the potential to provide an accessible and more fairly priced alternative when consumers experience a financial emergency.”
An estimated 10 percent of adults with an annual family income of less than $50,000 used payday, pawn, auto title or tax refund anticipation loans to secure needed funds. Bowman said those products “often carry high or even punitive direct and indirect costs and risks to the consumer. For example, non-repayment of an auto title loan can lead to vehicle repossession further complicating the consumer’s financial situation.”
Bowman also described the lack of financing options for small businesses. Tight financial conditions were causing small businesses to often rely on personal funds or a loan from friends or family to support their businesses, according to the Federal Reserve System’s annual Small Business Credit Survey of more than 6,000 firms with fewer than 500 employees.
“Because access to credit is fundamental to broader financial access and inclusion, this experience of reliance on personal financial resources shows that the credit needs of small businesses may not be fully met by the financial industry,” Bowman said.
Bowman said reducing remittance fees will also make the financial system more inclusive. The average cost of sending $200 internationally from the United States is nearly 6 percent, Bowman noted. G20 countries have again committed to reducing average remittance fees to under 3 percent by 2030.
Bowman also described the recent work she’s overseen as chair of the Division of Consumer and Community Affairs. “DCCA informs internal and external stakeholders by leveraging its research and analysis to provide information that can be utilized by external stakeholders to support their work,” Bowman said.
The division’s annual Survey of Household Economics and Decisionmaking was published in May and addressed financial well-being, retirement, economic fragility, student loans, savings and education.
