The Federal Reserve, OCC, FDIC and NCUA have published “Interagency lending principles for delivering responsible low-value loans. The agencies say the principles are intended “to encourage supervised banks, savings associations and credit unions to offer responsible small dollar loans to customers for consumer and small business purposes.”
The publication of the guidance follows publication of a statement by the CFPB and the four federal bank branches on March 26 which encouraged small dollar lending in response to the COVID-19 pandemic. In the statement, the agencies said they were “working on future directions and lending principles for responsible small dollar lending.”
The interagency guidelines describe the following characteristics of “responsible” lending programs:
- A high percentage of clients who repay according to the original loan conditions
- Repayment terms, pricing and guarantees that minimize negative consequences for clients, including debt cycles due to refinancing and re-borrowing
- Repayment outcomes and program structures that improve a client’s financial capabilities
The guidelines endorse the use of “innovative technologies or processes for clients that may not meet traditional underwriting standards of financial institutions” (reference the inter-agency declaration of December 2019 who recognized the benefits of using alternative data in credit decisions). It also endorses the use of “effectively managed third party relationships” to implement small loan programs.
The guide contains the following “fundamentals” for offering small loans:
- Offer loan products compatible with a safe and healthy bank, which treat customers fairly and comply with applicable laws and regulations
- Effective management of credit, operational, compliance and other risks
- Underwriting loan products based on prudent policies and practices governing amounts borrowed, frequency of borrowing and terms of repayment
The agencies also identify the following areas that would typically be addressed in ‘reasonable lending policies and good management practices and controls’:
- Loan amounts and repayment terms that align with eligibility and underwriting criteria and product structures, including shorter-term single payment structures, which allow for successful repayment within a reasonable timeframe rather than re-borrowings, renewals or immediate collectability in the event of default.
- Pricing of loans in accordance with applicable federal and state laws and reflecting overall returns reasonably related to the risks and costs of the institution (including for products offered through third party relationships).
- An underwriting that uses internal and / or external data sources, such as deposit account activity, and that can also use “new processes, technologies and automation managed effectively to reduce the cost of lending from low amount ”.
- Marketing and customer disclosures that comply with applicable laws and regulations and provide information in a clear, visible, accurate and user-friendly manner.
- Loan service and guarantees that include processes that help clients repay successfully without rollovers or re-borrowing, including timely and reasonable turnaround strategies for clients who are unable to pay due to unforeseen circumstances and restructuring single payment loans or credit lines of indefinite duration in several installments loans.
In May 2018, the OCC published a newsletter (2018-14) setting out the basic principles, policies and lending practices for short-term small dollar loans by domestic banks, federal savings banks and federal branches and agencies of foreign banks. OCC canceled this bulletin and published a new bulletin (2020-25) that reflects the new interagency guidelines.
The expectations of the OCC set out in the repealed bulletin regarding the policies and practices to be followed by its supervised institutions in offering small loans are similar to those set out in the interagency guidelines. However, the bulletin also contained potentially troubling terms that are not included in the interagency guidelines. In the newsletter, the OCC indicated that its “OCC’s” reasonable policies and practices specific to short-term and small-payment loans “included”[l]o Pricing in accordance with applicable state laws and reflecting overall returns reasonably related to the risks and costs of the product. The OCC also stated that it “viewed unfavorably an entity that partners with a bank for the sole purpose of evading a lower interest rate established under the law of granting entities to the state or States “.
We found the OCC reference to “[l]“Pricing in accordance with applicable state laws” may be confused (or likely to cause confusion). Federal law (12 USC Section 85) governs the interest that domestic banks may charge. It authorizes banks to charge interest permitted by the law of the state in which they are located, regardless of the law of any other state. As noted above, the interagency guidelines refer to “[l]o pricing in accordance with applicable federal and state laws.
We were also concerned that the OCC’s unfavorable opinion on bank-non-bank partnerships, where the “sole objective [is] escaping ”from the rate limits provided for by law, could be interpreted as calling into question a valuable distribution channel for bank loans. We are pleased that the interagency statement does not contain a similar statement or otherwise express an adverse opinion on bank-non-bank partnerships. Indeed, as noted above, the interagency statement endorses the use of “effectively managed third party relationships” to implement small loan programs.
Although the FDIC published an RFI in November 2018, seeking comments on steps it could take to encourage FDIC-supervised institutions to offer low-value credit products, the FDIC did not issue an NPRM. In his Letter from financial institution (FIL-58-2020) Regarding interagency guidelines, the FDIC says it is rescinding previous guidelines on small dollars as well as its guidelines on deposit advance products (which effectively prevented FDIC-supervised institutions from offer such products) and replaces these guidelines with the interagency statement. It also says it will make technical and conforming changes to its 2015 guidelines that clarify the FDIC’s approach to banks offering products and services, such as deposit accounts and credit extensions, to payday lenders. non-banking.