Pew Cautions Against Risky Third-Party Bank Partnerships

Letter to House committee provides evidence base to identify safe and unsafe small-dollar lending models

Pew Cautions Against Risky Third-Party Bank Partnerships

To inform discussion at the Feb. 5 hearing, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps,” The Pew Charitable Trusts provided the U.S. House Financial Services Committee with a summary of its research on small-dollar loans. 

In its letter, Pew drew stark contrasts between two types of partnerships between banks and third-party financial operators: one that allows mobile or online banking providers to help small and medium-sized banks offer safe, small installment loans, and another that permits payday or other nonbank lenders to use banks’ charters to originate high-cost loans that would otherwise violate state usury laws, putting consumers at extreme risk.

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Issue Brief

Standards Needed for Safe Small Installment Loans

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Issue Brief

Several recent developments have raised the possibility of banks and credit unions offering small installment loans and lines of credit—which would provide a far better option for Americans, who currently spend more than $30 billion annually to borrow small amounts of money from payday, auto title, pawn, rent-to-own, and other small-dollar lenders outside the banking system. Consumers use these high-cost loans to pay bills; cope with income volatility; and avoid outcomes such as eviction or foreclosure, having utilities disconnected, seeing their cars repossessed, or going without necessities. Many of these loans end up harming consumers because of their unaffordable payments and extremely high prices; in the payday and auto title loan markets, for example, most borrowers pay more in fees than they originally received in credit.

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Report

State Laws Put Installment Loan Borrowers at Risk

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Report

Approximately 14,000 individually licensed stores in 44 states offer installment loans, and the largest lender has a wider geographic presence than any bank and has at least one branch within 25 miles of 87 percent of the U.S. population.

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Agenda for America

Resources for federal, state, and local decision-makers

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Data-driven policymaking is not just a tool for finding new solutions for emerging challenges, it makes government more effective and better able to serve the public interest.