On March 26, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB) issued an interagency statement encouraging financial institutions to offer small-dollar loans to individuals and businesses impacted by COVID-19 [1]. This statement is one of the latest in a series of releases from the federal banking agencies urging financial institutions to support households and businesses impacted by the outbreak. It is also the most recent development in a larger push by the current administration, predating COVID-19, to get banks back into small-dollar lending.
Background
Since the outbreak of COVID-19 in the United States earlier this year, the federal banking agencies have made a series of announcements aimed at getting financial institutions to accommodate the needs of customers impacted by the virus. For example, the FRB, FDIC, and OCC, in a March 19 joint statement, indicated that the three agencies would give favorable Community Reinvestment Act (CRA) consideration to banking services and lending provided to certain individuals and small businesses impacted by COVID-19. [2] (Under the CRA, financial institutions are examined for how well they have met the credit needs of their community. [3]) These agencies noted that the activities that may receive this favorable treatment could include “[e]xpanding the availability of other short-term, unsecured credit products for creditworthy borrowers.” [4]
Interagency Statement on Small-Dollar Lending
The March 26 interagency statement “specifically encourage[d]” banks, savings associations, and credit unions to offer “responsible” small-dollar loans to individuals and small businesses.[5] After stating that the “current regulatory framework allows financial institutions to make responsible small-dollar loans,” the agencies noted that this lending can be structured in a variety of ways, including “open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” [6]
In addition to emphasizing that small-dollar loans be made “responsibly,” the agencies reminded financial institutions that small-dollar loans should be offered consistently with safe and sound practices, fair treatment of consumers, and applicable statutes and regulations. [7]
Finally, the agencies encouraged workout strategies for borrowers who are unable to pay due to “unexpected circumstances.” [8] Such workout strategies should help borrowers repay the loan principal and reduce their need to borrow again. [9]
Banks and Small-Dollar Credit
Though the federal banking agencies released this joint statement on small-dollar lending in response to COVID-19 and the needs of customers who may face cash flow issues and unforeseen expenses, [10] it is the latest development in a years-long process of encouraging banks to reenter the small-dollar lending market.
During the previous administration, regulators were more cautious of banks’ lending in this space. Their concerns included the cost of such small-dollar loans and the risk that borrowers would have trouble repaying them. [11] In 2013, both the OCC and FDIC released guidance for banks related to the offering of deposit advance products, a form of small-dollar loan. [12] This guidance is widely believed to have discouraged banks from engaging in small-dollar lending activity more broadly. [13] Indeed, the now-former Acting Comptroller of the Currency himself later expressed concern that “in the years since the agency issued the guidance . . . it has become difficult for banks to serve consumers’ need for short-term, small-dollar credit” and that consumers had been pushed to less-regulated lenders instead. [14]
Regulators under the current administration have been more open to small-dollar bank lending. They have expressed concern about what they view as unmet consumer demand for short-term, small-dollar lending. [15] In late 2017, the OCC rescinded its deposit advance product guidance. [16] By rescinding the guidance, the OCC sought to avoid inconsistencies with the final CFPB payday lending rule. [17] The agency was also motivated by the concern that “the guidance may even hurt the very consumers it is intended to help” by leading them to borrow from certain other non-bank lenders. [18] The OCC then followed up in May 2018 with a bulletin on short-term, small-dollar installment loans, encouraging banks to offer these products. [19] This bulletin included “core lending principles” and “[r]easonable policies and practices” for banks offering short-term, small-dollar installment loans. [20] Meanwhile, the FDIC issued a request for information on small-dollar lending “to seek public input on steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products.” [21] Together, these steps appear to have encouraged at least some bank activity in this space so far. [22]
Last week’s joint statement went beyond encouraging this kind of bank lending just to meet the emergency financial needs created by COVID-19. The agencies observed that “small-dollar loans can benefit … customers in more normalized times” and concluded with the update that they are “working on future guidance and lending principles for responsible small-dollar loans.” [23]
Conclusion
Encouraging small-dollar loans is another response by the federal banking agencies to the needs of customers following the COVID-19 outbreak. Yet the agencies’ statement follows a larger trend in the current administration of encouraging banks to offer this kind of loan product. Given this years-long effort, the agencies’ encouragement of this lending during a period of economic stress, and the agencies’ statement that they are working on additional guidance for small-dollar lending during “more normalized times,” there are likely to be more regulatory developments to come for banks in the small-dollar lending market.
Footnotes
[1] Joint Statement, Bd. of Governors of the Fed. Reserve Sys. et al., Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 (Mar. 26, 2020) [hereinafter Interagency Statement], https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200326a1.pdf (PDF: 61 KB).
[2] Joint Statement, Bd. of Governors of the Fed. Reserve Sys. et al., Joint Statement on CRA Consideration for Activities in Response to COVID-19 (Mar. 19, 2020), https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-19a.pdf (PDF: 54 KB).
[3] E.g., Community Reinvestment Act Regulations, 85 Fed. Reg. 1204, 1205 (proposed Jan. 9, 2020); FED. FIN. INSTS. EXAMINATION COUNCIL, JOINT REPORT TO CONGRESS: ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT 41 (2017), https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf (PDF: 6.9 MB).
[4] Joint Statement, Bd. of Governors of the Fed. Reserve Sys. et al., supra note 2.
[5] Interagency Statement, supra note 1, at 1.
[6] Id. at 1–2.
[7] Id. at 2.
[8] Id.
[9] Id.
[10] See id. at 1 (“The agencies recognize the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income short-falls during periods of economic stress or disaster recoveries.”).
[11] E.g., Lalita Clozel, Emergency Credit: Coming Soon to a Bank Near You?, WALL ST. J. (Mar. 30, 2018), https://www.wsj.com/articles/emergency-credit-coming-soon-to-a-bank-near-you-1522402200 (“Those [Obama-era] regulators viewed small loans by banks with suspicion because of concern about high interest rates and perceived repayment risks.”); see also FED. DEPOSIT INS. CORP., GUIDANCE ON SUPERVISORY CONCERNS AND EXPECTATIONS REGARDING DEPOSIT ADVANCE PRODUCTS 10 (2013), https://www.fdic.gov/news/news/press/2013/pr13105a.pdf (PDF: 88 KB) (“The combined impact of both an expensive credit product and short repayment periods increases the risk that customers may end up using what is marketed as a short-term credit product that results in debt over an extended period of time.”).
[12] Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, 78 Fed. Reg. 70,624 (Nov. 26, 2013); FED. DEPOSIT INS. CORP., supra note 11.
[13] See, e.g., American Bankers Association, Comment Letter on Proposed Retirement of Certain Financial Institution Letters (Oct. 10, 2018), https://www.aba.com/-/media/documents/comment-letter/cl-retirement2018oct10.pdf?rev=ad4f4278e0464f58b0fca4afefa397af (PDF: 217 KB) (“The . . . Guidance effectively blocked from the regulated banking system a sustainable small dollar credit option valued by many customers, forcing all but one bank that offered the product to exit the market and discouraging any new entrants.”); Andrew Ackerman, Banks Urged to Issue More Small-Dollar Loans in Response to Outbreak, WALL ST. J. (Mar. 26, 2020), https://www.wsj.com/articles/banks-urged-to-issue-more-small-dollar-loans-in-response-to-outbreak-11585239163 (“Regulators had taken a dim view of the business during the Obama administration, leading many . . . banks [to] refrain from offering the products without an explicit regulatory blessing such as the one provided on Thursday.”); Carolyn Duren, Financial Regulators Issue Joint Statement Encouraging Small-Dollar Loans, S&P GLOBAL MKT. INTELLIGENCE (Mar. 26, 2020), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/financial-regulators-issue-joint-statement-encouraging-small-dollar-loans-57775444 (“Many banks discontinued offering the product following 2013 guidance from the OCC and FDIC that discouraged small-dollar loans . . . .”).
[14] Press Release, Office of the Comptroller of the Currency, Acting Comptroller of the Currency Rescinds Deposit Advance Product Guidance (Oct. 5, 2017), https://www.occ.treas.gov/news-issuances/news-releases/2017/nr-occ-2017-118.html.
[15] See, e.g., U.S. DEP’T OF THE TREASURY, A FINANCIAL SYSTEM THAT CREATES ECONOMIC OPPORTUNITIES: NONBANK FINANCIALS, FINTECH, AND INNOVATION 127–30 (2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities—Nonbank-Financials-Fintech-and-Innovation_0.pdf (PDF: 3.1 MB); Clozel, supra note 11.
[16] Rescission of Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, 82 Fed. Reg. 47,602 (Oct. 12, 2017).
[17] Id. at 47,602. The CFPB rule set underwriting, payment withdrawal, and notice requirements for an array of loan products. See Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82 Fed. Reg. 54,472, 54,472–74 (Nov. 17, 2017).
[18] Press Release, Office of the Comptroller of the Currency, supra note 14; see also Rescission of Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, 82 Fed. Reg. at 47,602 (“As a practical matter, consumers who would prefer to rely on banks and thrifts for these products may be forced to rely on less regulated lenders and be exposed to the risk of consumer harm and expense.”).
[19] OFFICE OF THE COMPTROLLER OF THE CURRENCY, OCC BULL. 2018-14, INSTALLMENT LENDING: CORE LENDING PRINCIPLES FOR SHORT-TERM, SMALL-DOLLAR INSTALLMENT LENDING (2018), https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-14.html.
[20] Id.
[21] Request for Information on Small-Dollar Lending, 83 Fed. Reg. 58,566, 58,567 (Nov. 20, 2018).
[22] See Ackerman, supra note 13 (“At least one large lender . . . expanded its consumer credit offerings in response.”).
[23] Interagency Statement, supra note 1, at 2 (emphasis added).
Jonathan R. Silverstone is a J.D. candidate at New York University School of Law. He is a student fellow in the Program on Corporate Compliance and Enforcement and an associate editor of Compliance & Enforcement.
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