Regulators unite on small-dollar loan principles for banks, credit unions

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Four federal regulatory agencies released new guidance Wednesday that provides a uniform framework for banks and credit unions on how to offer small-dollar consumer loans without raising red flags in Washington.

The Federal Deposit Insurance Corp. also announced plans to rescind two older letters that banks had blamed for their reluctance to offer more credit options to cash-strapped consumers.


The long-awaited guidance — issued by the FDIC, the Office of the Comptroller of the Currency, the Federal Reserve Board and the National Credit Union Administration — is meant to encourage banks to provide more small-dollar loans. It offers broad principles rather than prescriptive rules.

For example, the guidance states that the price of small-dollar loans should be “reasonably related to the financial institution’s product risks and costs.” That language suggests regulators would frown upon a loan product that carries a sky-high interest rate while costing little money to originate and bringing little risk to the lender.

But it stops well short of more concrete restrictions, such as a 36% interest rate cap, which many consumer advocates favor. A regulatory official who spoke on condition of anonymity during a call with reporters said that the agencies did not believe it was appropriate to create a rate cap, or even to suggest the existence of such a ceiling, since none exists in federal law outside of restrictions on the price of loans to members of the military and their relatives.

The joint announcement Wednesday could help open the door for the return of so-called deposit advances, which a handful of banks offered until a crackdown during the Obama administration, though likely under modified terms.

Banks that offered deposit advances up until 2013 typically charged a $1.50 to $2 fee for every $20 borrowed, with the repayment often coming out of the borrower’s next direct deposit check. Much like in the payday loan industry, borrowers frequently rolled over their old loans into new ones, a debt cycle that drew criticism from consumer advocates.

The FDIC announced plans Wednesday to rescind its restrictive 2013 guidance on deposit advances, following the lead of the OCC, which took the same step in 2017. The deposit insurance agency also said that it will withdraw a 2007 letter to financial institutions that encouraged loans with annual percentage rates no higher than 36%.

The four-page joint guidance issued Wednesday offers principles that apply to “shorter-term single payment structures,” a description that fits the deposit advance product.

But the new guidance also contains language that may require banks to make changes to the discontinued version of the deposit advance product. For example, it states that product structures should “support borrower affordability and successful repayment” in a “reasonable time frame rather than reborrowing, rollovers, or immediate collectability in the event of default.”

Another complication for banks that are interested in reviving the deposit advance is the status of the Consumer Financial Protection Bureau's payday loan rule, which put restrictions on loans of 45 days or less. Though the bureau is expected to rescind much of the rule, its ultimate fate could be tied up in court for some time.

Under the earlier deposit advance product, banks got the first cut of any deposit into the customer’s account, which took away borrowers’ ability to determine which payments to prioritize, according to a second agency official who spoke to reporters on the condition of anonymity.

Under the new guidance, banks are likely to offer more flexibility to their customers about which bills to pay first, this official said.

The guidance goes beyond deposit advances, though. Its principles will also apply to certain open-end lines of credit that banks and credit unions offer to consumers, as well as to longer-term installment loans. It does not apply to either credit cards or bank overdraft programs, which offer another source of short-term liquidity to consumers.

The guidance encourages financial institutions to make small-dollar loans using underwriting techniques that go beyond borrowers’ credit scores. It specifically mentions analyzing consumers’ deposit account activity as a way to gauge their creditworthiness.

The interagency document also endorses the idea — prevalent in industry circles in recent years — that lenders can lower the cost of providing small-dollar credit by employing new technology.

The guidance got a warm reception Wednesday from the Consumer Bankers Association, which has been pressing regulators to provide a more unified framework in small-dollar lending.

"Previous guidance issued by regulators years ago cut off banks’ ability to offer customers short-term liquidity," Richard Hunt, the trade group's president and CEO, said in a written statement.

Alex Horowitz, senior research officer at the Pew Charitable Trusts, gave the joint guidance a largely favorable review, though he did express disappointment with certain provisions.

Horowitz expects more banks to start offering small-dollar consumer installment loans and lines of credit as a result of the guidance. "I think there's enough clarity here for banks," he said in an interview.

The National Consumer Law Center gave the regulators' actions a harsher judgment, describing them as part of a continued assault by the Trump administration on protections against high-cost loans.

"The American public strongly supports limiting interest rates to 36%, so it's shocking that in the middle of an economic crisis the FDIC would repeal its 36% rate guidance and its letter warning of the dangers of bank payday loans," Lauren Saunders, the NCLC's deputy director, said in a statement.

Small-dollar lending has been an area of interest for both Comptroller of the Currency Joseph Otting and FDIC Chair Jelena McWilliams, who have argued that pushing banks out of the market left payday lenders and other predatory players to fill the gap.

Federal agencies have been working to find a more harmonized approach to regulation since at least last year. The coronavirus crisis is an example of a situation in which responsibly offered small-dollar loans can play an important role in helping consumers, the four agencies that issued the new guidance said in a press release Wednesday.

This story has been updated to include reaction from the banking industry and consumer advocates.

Correction at 10:09 a.m. EDT Thursday: An earlier version of this story erroneously quoted Lauren Saunders of the National Consumer Law Center regarding the interest rate guidance given previously by the FDIC. That guidance encouraged loans with annual percentage rates no higher than 36%.

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