Federal bank and credit union regulators on Wednesday released a set of interagency lending principles to encourage institutions to offer responsible small-dollar loans to customers “for consumer and small business purposes,” noting the important role of such lending in periods of economic stress and other circumstances “such as the public health emergency created by COVID-19.”
The agencies – the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC) – said in a joint statement that they recognize the important role such lending can play in helping customers meet ongoing needs amid such crises, according to Wednesday’s announcement.
The agencies said responsible small-dollar loan programs generally reflect a high percentage of customers successfully repaying their small dollar loans in accordance with original loan terms, “a key indicator of affordability, eligibility, and appropriate underwriting”; repayment terms, pricing, and safeguards that minimize adverse customer outcomes, including cycles of debt due to rollovers or re-borrowing; and repayment outcomes and program structures that enhance a borrower’s financial capabilities.
The agencies’ core lending principles for financial institutions that offer small-dollar loan products include:
- 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.
Reasonable loan policies and sound risk management practices and controls for responsible small-dollar lending would, the agencies added, generally address the following:
- Loan structures: Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and credit access of applicants, and product structures, including shorter-term single payment structures, that support borrower affordability and successful repayment of principal and interest/fees in a reasonable time frame rather than reborrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing: Loan pricing that complies with applicable state and federal laws and reflects overall returns reasonably related to the financial institution’s product risks and costs. Any products offered through effectively managed third-party relationships would also reflect the core lending principles, including returns reasonably related to the financial institution’s risks and costs.
- Loan underwriting: Analysis that uses internal and/or external data sources, such as deposit account activity, to assess a customer’s creditworthiness and to effectively manage credit risk. Such analysis may facilitate sound underwriting for credit offered to non-mainstream customers or customers temporarily impacted by natural disasters, national emergencies, or economic downturns. Underwriting can also use effectively managed new processes, technologies, and automation to lower the cost of providing responsible small-dollar loans.
Wednesday’s interagency principles are in follow-up to a joint statement issued March 26 encouraging banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19.