WASHINGTON — The Office of the Comptroller of the Currency's May bulletin authorizing national banks to compete with payday lenders was seen as a welcome move by industry groups, but it has prompted new questions about whether other regulators will follow suit.

The OCC bulletin encouraged federally chartered banks to make small-dollar loans of 45 days or more in an attempt to remove regulatory roadblocks that have contributed to banks avoiding the installment lending space. Yet there remains skepticism by some about whether banks will try to take market share from payday lenders.

Observers say similar decrees by the Federal Deposit Insurance Corp. and Federal Reserve Board, which both regulate state-chartered banks, could provide greater certainty and protect against competitive inequity for different charters.

Comptroller of the Currency Joseph Otting and FDIC Chairman Jelena McWilliams
The OCC bulletin under Comptroller Joseph Otting encouraged banks to offer installment loans to borrowers with FICO scores of 680 or below. Sources says FDIC Chairman Jelena McWilliams’ review of the agency’s policies may include a look at installment lending. Bloomberg News

“It does threaten to create an uneven playing field in the market for small-dollar loans,” Dan Schwartz, a director of policy development at the Conference of State Bank Supervisors, said of the OCC having one policy that is not followed by other agencies. “We definitely wouldn’t want to see that uneven playing field given that the other regulation and supervision of lending across the banking system is pretty harmonized between states and federal regulators.”

The industry and state regulators are mostly waiting on a position from the FDIC, which regulates more charters than any of the three banking agencies and has backup supervisory authority for other banks as the nation's deposit insurer.

“Our banks would love to re-enter the [small-dollar] market if they felt like they would not be hammered by the FDIC,” said Texas Department of Banking Commissioner Charles Cooper. “I would hope the new chairman would review the FDIC previous positions on this and be more supportive on small-dollar loans.”

FDIC Chairman Jelena McWilliams took office only in June and has said she wants to review all policies, but a formal position on installment loans is still unclear. The agency has also not followed the OCC's decision in October to rescind a 2013 policy, then issued by both agencies, to crack down on banks offering deposit advance products.

Sources said McWilliams' review is likely to include installment lending as well as the 2013 guidance.

“I have asked staff already to take a look at the existing rules and to make me a list of all the guidelines that we have issued for comment and not for comment, as well as the rulemakings,” McWilliams said at a regulatory conference June 19 in Washington hosted by The Clearing House and the Securities Industry and Financial Markets Association.

Despite uncertainty about the agency's position, the FDIC has supported banks making small-dollar loans in the past. About a decade ago, under then-FDIC Chairman Sheila Bair, the agency launched a pilot program and designed a small-dollar product for depository institutions to offer as an alternative to higher-cost lenders. But the program, which tried to restrict consumer costs, failed to gain much traction.

The OCC rescinded its deposit advance guidance under then-acting Comptroller Keith Noreika. But the OCC under current Comptroller Joseph Otting went a step further in May by encouraging banks to get back into offering installment loans, specifically loans of $300 to $5,000 to borrowers with FICO scores of 680 or below.

The National Credit Union Administration issued a proposal a day after the OCC released its bulletin that would allow credit unions to offer a “payday loan alternative” to members.

“The [NCUA] Board’s goal is to help people of modest means by expanding access to safe and affordable short-term, small-dollar loans,” NCUA Board Chairman J. Mark McWatters said in a statement after the May 24 meeting. “Federal credit unions have had a payday alternative loan option since 2010, which has been extremely effective. Now, we want to create additional opportunities.”

But observers say clearer statements from the both the FDIC and the Fed would be helpful. (Both agencies declined to comment for this story.) Some sources said the FDIC could issue a policy specifically allowing for installment loans without having to rescind its previous 2013 guidance on deposit advance.

Alex Horowitz, senior research officer at the Pew Charitable Trusts, said that the OCC and NCUA’s actions “are moving in the right direction” but that “there are still some obstacles” to getting lenders on board. Pew has been an outspoken advocate for regulators to encourage banks to offer small-dollar credit options.

Installment lending “can be profitable, but it’s not worth the regulatory risk so we need really strong clarity,” he said.

Lenders remain hesitant to enter the business partly because not all federal regulators have weighed in and banks, fearing an enforcement action, want further guidance on what products they can or cannot offer.

“We’ve heard from Fed banks that it would be helpful to have some clarity from the Fed, especially because the regional Fed banks act very independent from each other,” Horowitz said. “Having something clear in writing would help create some clarity.”

Even Otting recently acknowledged the challenge to get banks on board despite repeated encouragement.

“I have personally met with all the large bank CEOs, and I started doing this after I arrived to encourage them that we would be releasing a bulletin,” Otting said during a Senate Banking Committee hearing June 14. “Many of the financial institutions now are looking at products. It does take a while to go through a risk management review as they bring these products back up online, but I'm confident more banks will enter into that sector.”

Observers said the OCC may need to go a step further, such as issuing a guidance that would signal a stronger position than a bulletin.

“I would be concerned if they [the OCC] do not issue further guidance. The core principles definitely attempt to not be prescriptive and suggest plans to discuss small-dollar lending with examiners,” Schwartz said. “I get that and it’s good, but without clear guidance, banks will continue to be unclear about what they can do and what they can’t do, and how best to offer these products.”

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