The federal financial regulatory agencies are pulling every possible lever to coax, incentivize, and allow banks to find new ways to help consumers and businesses that are facing financial distress due to COVID‑19. 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—previously issued in March a high-level joint statement that generally encouraged depository institutions to make responsible small-dollar loans.
On May 20, the agencies (without the CFPB) issued a more detailed joint statement of principles (Statement) for banks, thrifts, and credit unions to follow in making small-dollar loans to both consumers and businesses. Meanwhile, on May 22, the CFPB issued a new No-Action Letter Template (Template) for depository institutions subject to CFPB supervision that are seeking to offer standardized, small-dollar credit products. Together, the CFPB's participation in the March release and the close timing of the Statement and Template suggest that the agencies are all working together to encourage increased small-dollar lending by federally regulated institutions.
In their individual releases, the OCC and FDIC each noted that the uniform Statement across the agencies is different from the agency's own previous small-dollar lending. The OCC, therefore, rescinded and replaced OCC Bulletin 2018-14, and the FDIC likewise rescinded and replaced FIL-50-2007 and PR-105-2013. OCC- and FDIC-supervised banks already offering small-dollar loans should ensure their programs align with the new Statement.
Principles for Small-Dollar Lending
Core Lending Principles—The Statement identifies three core lending principles that should be reflected in a financial institution's small-dollar loan program:
- Loan products are consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations.
- Financial institutions effectively manage the risks associated with the products they offer, including credit, operational, and compliance.
- Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing, and repayment requirements.
Policies, Practices, and Controls—The Statement then sets out five areas that should be addressed in a financial institution's policies, practices, and controls in a manner consistent with the core principles:
- Loan structures
- Loan amounts and repayment terms should align with the financial institution's underwriting criteria and promote fair treatment of applicants.
- Product structure should support affordability and successful repayment "rather than reborrowing, rollovers, or immediate collectability in the event of default."
- Loan pricing
- Overall returns should be "reasonably related" to the product risks and costs.
- Pricing of products offered through third-party relationships should be reasonably related to the financial institution's risks and costs.
- Loan servicing and safeguards
- Servicing processes should assist customers "in achieving successful repayment while avoiding continuous cycles of debt and significant credit costs."
- Financial institutions should work with distressed borrowers, using "timely and reasonable strategies," such as "restructuring single payment loans or open-end lines of credit into installment loan structures in appropriate circumstances."
- Loan underwriting
- To facilitate sound underwriting for non-mainstream customers or customers temporarily impacted by economic downturns, underwriting should utilize additional or alternative data sources, such as deposit account activity, in assessing a customer's creditworthiness and to effectively manage credit risk.
- Underwriting can also use "effectively managed new processes, technologies, and automation" to lower the cost of providing small-dollar loans.
- Loan marketing and disclosures
- Disclosures required by consumer protection laws and regulations should be provided in "a clear, conspicuous, accurate, and customer-friendly manner."
- Applicable laws and regulations may include the Equal Credit Opportunity Act, the Truth in Lending Act, section 5 of the Federal Trade Commission Act, and section 1036 of the Dodd-Frank Wall Act.
The agencies envision that, by following the core principles, banks will create "responsible small-dollar loan programs" that have a high percentage of successful repayments in accordance with the original loan terms (a key indicator of affordability, eligibility, and appropriate underwriting); terms, pricing, and other safeguards minimizing adverse customer outcomes, such as "cycles of debt due to rollovers or reborrowing"; and program structures that enhance a borrower's financial capabilities.
In addition to encouraging financial institutions to refer to the core lending principles, the agencies also noted financial institutions "may, but are not required to, discuss plans for small-dollar loan products with their supervisors before implementation, particularly if the offerings constitute substantial deviations from their existing business plans."
No Action Letters for Small-Dollar Credit Programs
Depository institutions can use the new Template to request a no-action letter (NAL) from the CFPB that addresses unfair, deceptive, and abusive acts and practices (UDAAP) with respect to their small-dollar loan products. If a NAL is issued, it will provide the recipient institution with a safe harbor from UDAAP-related supervisory findings or enforcement actions by the CFPB. A NAL is effective, however, only to the extent that the submitted Template accurately describes the loan product and the depository institution's continued conduct.
In the Template, the CFPB establishes thirteen eligibility requirements (called "Guardrail Certifications" in the Template) that an institution must meet to receive a NAL. The following are some of the key requirements:
Status—NAL relief is available only to an insured depository institution or insured credit union (or their insured affiliates) with total assets greater than $10 billion.
Product Eligibility¬—The small-dollar loan products can be offered and provided only to consumers who hold a deposit account with the depository institution.
Rollovers—Extending or renewing a loan or draw on which a scheduled payment has not been made in exchange for an additional fee is prohibited. A new loan or draw cannot be extended until any existing loan or draw is fully repaid and cannot be provided to repay an outstanding balance on a prior loan or draw.
Underwriting—Cash flow underwriting must be utilized (i.e., review a borrower's transaction activity in the existing account with the depository institution).
Servicing—The institution (not a third party) must service the loan product.
Applicant depository institutions must also provide information about their small-dollar credit products (e.g., anticipated APR range, fees, repayment term and structure, and marketing materials). The depository institution may also include a description of any other feature of the small-dollar loan product or any acts or practices that will be associated with offering or providing the product to request their inclusion in the scope of the potential NAL.
The federal agencies want banks and credit unions to help meet the urgent need for credit among consumers and small businesses. But recent history shows these institutions are reluctant to enter the small-dollar loan marketplace. With the agencies' encouragement and the potential safety of a NAL, banks may finally be ready to jump in. Financial institutions considering new small-dollar loan programs should contact the authors for help with developing a regulatorily compliant product and completing the CFPB Template. All financial institutions are also encouraged to visit Venable's COVID-19 Resources page.