A banking agency bulletin issued Wednesday to encourage banks and savings institutions to provide consumers short-term, small-dollar installment loans – and offering principles and polices to help them do so without running afoul of a federal payday lending rule – drew praise from the acting director of the federal consumer protection agency.
“Bank-offered products can help lead consumers to more mainstream financial services without trapping them in cycles of debt,” Comptroller of the Currency Joseph Otting said in a statement accompanying Bulletin 2018-14. “When banks offer products with reasonable pricing and repayment terms, consumers also benefit from other services that banks regularly provide, such as financial education and credit reporting.
“By participating in this important space, banks increase the supply and choices available to consumers, which can reduce borrowing costs and have other beneficial market effects.”
BCFP Acting Director Mick Mulvaney applauded the comptroller for addressing the need for small, short-term loans. “Millions of Americans desperately need access to short-term, small-dollar credit. We cannot simply wish away that need. In any market, robust competition is a win for consumers,” he said in a statement. “The Bureau will strive to expand consumer choice, and I look forward to working with the OCC and other partners on efforts to promote access and innovation in the consumer credit marketplace.”
The OCC (Office of the Comptroller of the Currency) last October rescinded previous guidance on deposit advance products – guidance the OCC says “would have subjected banks to potentially inconsistent regulatory direction and undue burden” in preparing to comply with the BCFP’s payday lending rule. The rule’s underwriting requirements (compliance is required by Aug. 19) generally apply to consumer loans with maturities shorter than 45 days or longer-term loans that involve balloon payments.
In Bulletin 2018-14, the OCC presents an overview of the core lending principles, policies and practices that banks are encouraged to follow in offering small-dollar, short-term loans.
The three core lending principles are:
- All bank products should be consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations.
- Banks should effectively manage the risks associated with the products they offer, including credit, operational, compliance, and reputation.
- All credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements.
Reasonable policies and practices specific to short-term, small-dollar installment lending, the OCC says, would generally include the following:
- Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants. Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.
- Loan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs. The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).
- Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk. Such analysis could facilitate sound underwriting for credit offered to consumers who have the ability to repay but who do not meet traditional standards.
- Marketing and customer disclosures that comply with consumer protection laws and regulations and provide information in a transparent, accurate, and customer-friendly manner.
- Loan servicing processes that assist customers, including distressed borrowers. To avoid continuous cycles of debt and costs disproportionate to the amounts borrowed, timely and reasonable workout strategies should be used.
- Timely reporting of a borrower’s repayment activities to credit bureaus. Borrowers should have the ability to demonstrate positive credit behavior, build credit history or rebuild credit scores, and transition into additional mainstream financial products.
Noting that the bureau in January said it planned a rulemaking process to reconsider the payday rule, the OCC says it intends to work with the BCFP and other stakeholders “to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”