Banking reformers should first do no harm

Eric Trevan is a faculty member in The Evergreen State College Master’s in Public Administration Program.
Eric Trevan is a faculty member in The Evergreen State College Master’s in Public Administration Program.

The burden of student loans and consumer debt is again in the spotlight, as Presidential candidates promise relief through loan cancellations, interest rate caps, and broad reforms to our banking system.

The President and Congress elected in 2020 must address consumer debt burdens and the cost of credit. Fair access to capital helps Americans of all backgrounds create financial stability so they can realize a true quality of life.

Congress may consider sweeping changes to our financial system as early as this fall with debt forgiveness leading to increased family incomes and “rate-cap” proposals that impact access to capital.

For many communities, accessing banking and credit is already an uphill battle. This includes rural and minority communities, those living paycheck to paycheck, and young entrepreneurs. And let’s not forget Native American nations, with some of the highest poverty levels, unemployment, and less access to secondary education than other populations.

As an economic development researcher and advocate for rural, tribal, and minority-owned businesses, I’m concerned that well-intentioned policies produced by political campaigns — not designed through careful market research — may prove disastrous for our communities.

In Washington D.C., members of the House Financial Services Committee are working hard to find a balance between consumer protection and credit preservation. Sadly, existing policies already make it almost impossible for vulnerable communities to access capital — even small loans of $500 or less. It sometimes feels that consumer protections are put into place without regard for credit access, by those who don’t live with the daily realities of needing a new tire, books for college, or paying for child care when funds are stretched. America’s lawmakers must commit to truly understanding the impacts of new finance laws.

For example, we know that when artificial constraints are placed on market-based capital solutions, lending to high-income borrowers remains steady or increases, while lending to low-income consumers and the underbanked declines. America’s vulnerable communities cannot withstand further disruption to credit access. Therefore, we must be sure that any bill that protects consumers by constraining lending offers an alternative for those suffering from credit scarcity.

In a recent Washington Post piece, Brookings Institution fellow Aaron Klein and Professor Lisa Servon, author and advocate for the underbanked, expressed concern about working families with unsustainable debt, but cautioned against proposals that are “likely to hurt the people it’s designed to help, driving the market away from consumers with low credit scores.”

With reforms seeming imminent, the Federal Reserve has a specific responsibility to maintain the stability of our financial system for all Americans. The House Financial Services Committee should strongly encourage the Federal Reserve to provide research and guidance for any potential policy changes that may impact minorities, Native American nations, disadvantaged business enterprises, and rural communities.

A balanced banking system improves lives, helps small businesses grow, and allows disadvantaged families to flourish beyond an adverse economic event or emergency. Financial reforms should be based on unbiased research and facts to ensure America’s disadvantaged communities are not left behind.

Eric Trevan is a faculty member for The Evergreen State College Master’s In Public Administration Program. He is the past President/CEO of the National Center for American Indian Enterprise Development.