This week, a reporter friend of mine asked my thoughts on the prospects of traditional banks and credit unions getting into, what can only be called, the payday lending space IF the Administration’s regulatory reform proposals get through the Congress. It seems some banks have made overtures about doing just that, but this is very anecdotal and far from the norm. Frankly, I am kind of professionally ambivalent on the matter, but I still gave these bullet points to him:
- Due to the costs associated with extending credit, it is hard to imagine banks falling over themselves to start making a bunch of $300 two week loans for business purposes.
- There is a difference between making a small, short-term loan for an established client and making one to a stranger off the street.
- At a 10% annual rate, a $500 two-week loan generates about $2 in interest for the lender. Can they originate, underwrite, and service the thing for that of money, let alone overhead? Candidly, it makes more business sense to let people bounce checks.
- There is a difference between what the company spokespeople say and the what the CFO offices think. Guess who normally wins that argument.
- Those banks which enter this lending arena will do so up to the point where they maximize their Community Reinvestment Act rating, and probably not much more than that. That is cynical but honest, and better than nothing. …Read More…