Brown urges Obama to implement small dollar loan programs

By Stephanie K. Mann, J.D.

In a letter to President Obama, Sen. Sherrod Brown (D-Ohio) urges the President to implement funding for programs that encourage initiatives for financial products and services that are appropriate and accessible for “millions of Americans who are not fully incorporated into the financial mainstream.” Specifically, Brown is urging the Administration to enact Title XII of the Dodd-Frank Act—Improving Access to Mainstream Financial Institutions.

According to the letter, former Senator Herb Kohl, a primary author of the title, said that “this grant making program will dramatically help to increase the number of small dollar loan options to consumers that need quick access to money so that they can pay for emergency medical costs, car repairs and other items they need to maintain their lives.”

Increasing financial inclusion. The operative sections—1204, 1205, and 1206—authorize the following:

• the Treasury Department to establish programs with eligible entities to help low- and moderate-income individuals to access accounts at banks and credit unions;
• eligible entities can provide products and services, such as small-dollar loans, financial education, and counseling;
• the Treasury Department may establish partnerships with non-profits, federally insured depository institutions, community development financial institutions (CDFI), or state, local, or tribal governments to provide low-cost small dollar loans with reasonable terms; and 
• amend the Community Development Banking and Financial Institutions to enable to CDFI Fund to help CDFIs defray the costs of operating small dollar loan programs and to encourage CDFIs to establish and maintain small dollar loan programs. 

A 2014 Federal Deposit Insurance Corporation study found that at least 27 percent of households are unbanked or underbanked, representing at least 67.6 million American adults. This results in more than one in four American adults have obtained financial services and products from non-bank, alternative financial services (AFS), which can lead to a dangerous cycle of debt. Brown’s letter cites the fact that the average underserved household has an annual income of $25,500 and spends $2,412 on AFS fees and interest, or 9.5 percent of their income.

According to Brown, Title XII can address the problem of inadequate access to banks and can “potentially lead to alternatives that will enable more people to responsibly manage their finances.”

Continued support. In support of Brown’s letter, the Consumer Bankers Association released a statement saying that the Office of the Comptroller of the Controller and FDIC “essentially eliminated a very popular and widely used bank product which helped many of these working families make ends meet.” The result has been costly to consumers who now pay higher interest rates through payday and other nonbank industries. “We continue to support sound initiatives which help consumers gain access to credit as they strive to achieve their financial dreams,” said CBA’s President and CEO Richard Hunt.

For more information about the unbanked and underbanked, subscribe to the Banking and Finance Law Daily.