This week, the Office of the Comptroller of the Currency (OCC) signaled a big shift in how it views small-dollar installment loans issued by the institutions it regulates. In OCC Bulletin 2018-14 to the CEOs of all national banks, federal savings associations, and others, the agency announced it now “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”
Historically, the OCC and other federal banking agencies have shied away from encouraging their regulated institutions from offering small-dollar loans and left that market to the payday lending industry. The bulletin noted that U.S. consumers borrow nearly $90 billion every year in short-term, small-dollar loans typically ranging from $300 to $5,000, and that many banks have withdrawn from this market. If you read between the lines of the bulletin, the OCC appears to understand that its previous guidance on this subject has driven consumers away from OCC-regulated institutions and, in their place, toward the high-cost payday lending industry.
It is also important to note that in October 2017, the OCC ended its guidance for other types of small-dollar loans called “deposit advance products.” That guidance made it very difficult for OCC-regulated institutions to enter what is another aspect of the small-dollar loan industry. Also, the OCC had potentially inconsistent regulatory direction compared to rules from the Consumer Financial Protection Bureau (CFPB), which would’ve put an undue burden on many banks as they prepared to comply with the CFPB final rule titled “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” commonly called the “Payday Rule.” The CFPB’s Payday Rule underwriting requirements, which have a compliance date in August 2019, generally apply to consumer loans with maturities shorter than 45 days or longer-term loans that involve balloon payments.
In January 2018, the CFPB stated that it intends to engage in a rulemaking process to reconsider the Payday Rule, but it did not indicate the specific changes that it is considering. The OCC intends to work with the CFPB and other stakeholders to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.
The new OCC bulletin outlines how a national bank should structure a small-dollar lending program and establishes three core lending principles for banks to consider when offering these new products:
- 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 reputational risks.
- All credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements.
Moreover, the OCC bulletin noted that reasonable policies and practices specific to short-term, small-dollar installment lending 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.
Finally, the OCC linked most of its information regarding small-dollar loans and all relevant risk management principles for new, modified or expanded short-term, small-dollar installment lending products.
We will continue to monitor the development of this market as the OCC and CFPB essentially reopen the small-dollar loan industry to the major financial institutions they regulate – in stark contrast to the years (if not decades) of hostility the regulators have previously shown in this area.
For more information, please contact me or your regular Parker Poe contact.