Little more than a week after the deadline expired for repealing the Consumer Financial Protection Bureau’s (CFPB) payday lending rule, the Office of the Comptroller of Currency (OCC) issued its own policy statement regarding short-term, small-dollar lending.
The new OCC guidance encourages banks to offer responsible installment loans, typically between two and 12 months in duration with equal amortizing payments, to help meet the credit needs of their customers.
“U.S. consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000,” the guidance states. “Many banks have withdrawn from this market, resulting in consumers often turning to alternative lenders.”
The guidance recommends a number of ways banks can enter the small-dollar loan market, which can be boiled down to two broad pieces of advice for banks to consider:
- Refer to the core lending principles, outlined in the bulletin, when conducting activities related to short-term, small-dollar lending; and
- Consult with an OCC portfolio manager, examiner-in-charge or supervisory office before implementing plans to offer short-term, small-dollar lending products, particularly if the offerings constitute substantial deviations from existing business plans.
Specifically, the OCC is urging banks to reference reasonable policies and practices pertaining to installment lending, which include the following:
- Ensure that loan amounts and repayment terms align with eligibility and underwriting criteria and that promote fair treatment and access of applicants, and that product structures support borrower affordability and successful repayment of principal and interest in a reasonable time period;
- Ensure that loan pricing complies with applicable state laws and reflects overall returns reasonably related to product risks and costs as the OCC frowns upon entities that partner with banks for the sole purpose of evading a lower interest rate established under the law of the entity’s licensing state(s);
- Reference analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk, which generally facilitates sound underwriting for consumer credit offerings absent traditional ability-to-repay standards;
- Use marketing and customer disclosures that comply with consumer protection laws and regulations and provide information in a transparent, accurate and customer-friendly manner;
- Use loan servicing processes that assist customers, including distressed borrowers, and employ timely and reasonable workout strategies should be used to avoid continuous cycles of debt and costs disproportionate to the amounts borrowed;
- Ensure timely credit reporting of borrowers’ repayment activities to give borrowers the opportunity to demonstrate positive credit behavior, build credit history, improve their credit scores and transition into additional mainstream financial products.
CFPB acting director Mick Mulvaney issued a statement thanking Comptroller Joseph Otting for issuing the bulletin. He reiterated the OCC’s assertion that payday loans are an important source of credit for many consumers.
“I applaud Comptroller Otting’s move to encourage national banks and federal savings associations to offer short-term, small-dollar installment loans,” Mulvaney said. “Millions of Americans desperately need access to short-term, small-dollar credit. We cannot simply wish away that need. In any market, robust competition is a win for consumers. The bureau will strive to expand consumer choice, and I look forward to working with the OCC and other partners on efforts to promote access and innovation in the consumer credit marketplace.”
Noting the CFPB’s plans, announced in January, to reconsider its payday lending rule, the guidance states that the OCC intends to work with the bureau and other stakeholders to ensure that OCC-supervised banks can engage in responsible consumer lending, including lending products covered by the payday lending rule.
American Bankers Association (ABA) President and CEO Rob Nichols also touted the OCC’s guidance, as well as the agency’s intention to work with the bureau on payday lending compliance policies.
“There is a clear demand for small-dollar loans, and today’s bulletin is a step in the right direction to help banks offer customers a variety of short-term credit products,” Nichols said in a statement. “We appreciate that the principles outlined in the bulletin are not prescriptive and encourage banks to design their own underwriting and product features that promote access and treat customers fairly.
“We are also encouraged that the OCC intends to work with the Bureau of Consumer Financial Protection as it reviews the payday lending rule to ensure OCC-supervised banks can engage in small-dollar lending,” he continued. “We look forward to working with these agencies to remove regulatory impediments that stand in the way of banks’ ability to meet consumers’ short-term credit needs. Allowing banks to innovate will lead to more diverse products and greater consumer choice.”
The Consumer Bankers Association (CBA) President and CEO Richard Hunt welcomed the OCC’s small-dollar lending bulletin, praising the agency’s intent to offer clarity for the industry and opening the door to a financial marketplace that many banks have shied away from in recent years.
“Study after study has shown that millions of Americans do not have enough money in their bank account to pay unexpected bills ranging from auto repairs to medical expenses,” Hunt said in a press release. “Regulatory uncertainty forced banks out of this space, leaving families to rely on pawn shops, costly payday lenders or loosely regulated online lending during times of financial stress. This guidance sends a clear signal bankers can help customers receive short-term loans within the well-regulated, cost-effective banking system.
“CBA member banks would like to thank Comptroller [Joseph] Otting for taking this first step and many look forward to serving customers during times of need through responsible small-dollar loans,” he added.
The new guidance reflects a change in attitude among bank examiners since 2013, when the OCC and the Federal Deposit Insurance Corp. (FDIC) issued guidance making it notably difficult for depository institutions to offer a viable alternative to compete with payday lending.
Prior to 2013, several banks offered short-term, small-dollar lending products, known as a deposit advance products (DAPs), to meet consumer demand for access to emergency credit. In October 2017, the OCC rescinded its guidance on DAPs to avoid subjecting banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the CFPB’s payday lending rule.
CBA noted that it long has advocated for regulators to adjust the guidance to allow banks to reenter the small-dollar lending space and provide consumers with safe, affordable small-dollar loans.
The association also pointed out a recent Federal Reserve report indicating that approximately 40 percent of adults would not be able to pay an unexpected $400 expense without borrowing funds or selling a personal item. The report was titled “Economic Well-Being of U.S. Households in 2017.”
Community Financial Services Association of America (CFSA) CEO Dennis Shaul said that his industry welcomes competition from depository institutions entering the small-dollar loan market.
“Competition is a win for consumer choice because it helps spur innovation, which in turn improves products and services while reducing costs,” Shaul said in a statement. “That said, banks in the past have tried to offer these loans and found them unprofitable. In 2009, for example, the FDIC tested a Small-Dollar Loan Pilot Program to explore the viability of banks offering small-dollar loans. Banks stopped offering these loans because they were unsustainable.”
The CFPB’s payday lending rule is set to become applicable in August 2019, generally covering consumer loans with maturities shorter than 45 days or longer-term loans involving balloon payments.