Federal financial regulatory agencies continue to look to banks and other depository institutions for help with mitigating the effects of COVID-19. They asked banks to work with borrowers and, if necessary, to modify their loans. They urged banks to use the discount window to increase consumer and business lending. They even implored banks to dip into the capital and liquidity buffers built up since the 2008 financial crisis to further increase their lending.
On March 26, the agencies—the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau—issued a joint statement encouraging depository institutions to respond to COVID-19 by making responsible small-dollar loans to both consumers and small businesses.
The agencies want depository institutions to offer products, such as “open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans,” in small-dollar amounts. Small-dollar lending can meet urgent short-term needs caused by the COVID-19 emergency, including “temporary cash-flow imbalances, unexpected expenses, or income short-falls.” The agencies note that “[t]he current regulatory framework allows financial institutions to make responsible small-dollar loans.”
The joint statement repeatedly emphasizes the “responsible” nature of any small-dollar loans that depository institutions choose to make. The agencies appear to be drawing a contrast with payday-type lending, which is sometimes viewed as harmful to consumers. However, commercial banks have remained reluctant to enter the small-dollar market, often leaving non-bank lenders as the only source of credit for underserved populations.
Recognizing this history, the joint statement concludes by announcing that “[t]he agencies are working on future guidance and lending principles for responsible small-dollar loans to facilitate the ability of financial institutions to more effectively meet the ongoing credit needs of their communities and customers.”
Depository institutions considering new small-dollar loan offerings should contact the authors for help with developing a regulatorily compliant product. All financial institutions are also encouraged to visit Venable’s COVID-19 Resources page.