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Choking Off Access to Credit

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The economy's slow recovery and increased caution from banks of all sizes have made credit harder to come by for everyone, especially underbanked households. Those already squeezed may soon feel choked as a new, coordinated effort among the U.S. Department of Justice and federal banking agencies threatens to further restrict access to credit for millions of Americans.

Recently, there have been stories about an effort to target nonbank lenders and other businesses through back channels in an operation known as "Choke Point." While its original intention was to eliminate illegal, unscrupulous businesses, "Choke Point" is adversely impacting legal, licensed companies, cutting off essential banking services to these businesses. At present, dozens of nonbank lenders have had their depository accounts terminated by their banks with little or no notice, and with no real explanation except that regulatory pressure was placed on them to cut ties with these businesses.

Such stories are concerning, as this operation both circumvents the regulatory process and threatens the ability of these nonbank lenders to extend credit to communities underserved by the traditional banking system, particularly minority communities.

As the national advocate for more than 200 local chambers of commerce and 3.2 million Hispanic-owned businesses across the United States and Puerto Rico, the USHCC takes special interest in small businesses that take the initiative, make the commitment and risk their capital to do business in our communities.

Credit is the lifeblood of consumers and businesses alike. Having spent over half my career in the banking sector, I understand why some banks serve some communities while not others. The onerous regulations and restrictions placed on banks render it impossible to serve every consumer the same way. And in the absence of banks, nonbanks fill an important void, offering critical access to credit and other important financial services. These services include small dollar loans, money transmittal, cash checking and prepaid cards. A 2011 FDIC survey found that 25 percent of all American households and 65 percent of underbanked households have used alternative financial services from nonbanks in the past year.

Meanwhile, research has shown that the money spent by minorities is disproportionately spent in their own communities. Additionally, a large portion of nonbank loans are used to pay bills at small businesses. Money spent at small businesses stays in the community, circulating locally and boosting local economies. We need to do everything we can to support this type of spending to help both small businesses and their communities.

In spite of these facts, nonbank lenders and small dollar credit products have found themselves under increased scrutiny from regulators. While consumer protection is of the utmost importance, new guidelines and regulations shouldn't unduly restrict access to these much-needed products and services. Further, restricting legitimate credit options should never happen in a back room and without proper due process, as appears to be the case with "Choke Point."

Let us not forget that the nonbanks, which are being targeted are registered, regulated, reliable businesses which serve locations most often not reached by other financial service providers. This industry is responsible for over 155,000 jobs across nearly 24,000 storefront community locations nationwide, that contribute over $2.6 billion in federal, state and local taxes annually. Regulatory overreach threatens to hurt the very communities it attempts to help by killing jobs, draining away tax revenue and cutting access to essential services in communities without other alternatives.

In order to support our communities, we need to follow three principles in developing policy and regulations. First, we must encourage banks and nonbanks alike to make credit available to consumers and business owners who lack access to traditional credit sources. Second, we must also develop a regulatory regime that enables nonbanks to continue offering consumers and businesses safe, reliable credit options. Third, we need to hold lenders accountable to high business standards and ensure important consumer protections are in place.

Under almost every circumstance, restricting access to credit is not the answer. Doing so would have a disproportionate impact on small and minority-owned businesses and the communities in which they operate. When both businesses and their consumers don't have access to the capital they need, their communities suffer. As these communities struggle to operate at their full potential, our economy and nation as a whole suffers as well.

Given the increased importance of access to credit in underbanked communities, on March 27, the U.S. Hispanic Chamber of Commerce will host a workshop during its Annual Legislative Summit in Washington, D.C., where a panel of experts and key stakeholders will discuss ways to meet the demand for credit and other nonbank financial services while protecting consumers. We invite regulators and elected officials to join us for this productive and constructive discussion.

As businesses innovate and change, the credit market, like all markets, will continue to evolve. We need to make sure that our regulations help consumers and businesses, not "choke" them.

Javier Palomarez is the President & CEO of the United States Hispanic Chamber of Commerce (USHCC)