FDIC Encourages Small-Dollar Lending in New RFI

Financial Services Law

The Federal Deposit Insurance Corporation (FDIC) has signaled renewed interest in small-dollar lending. In a new Request for Information (RFI), the regulator sought input on how it can encourage its supervised institutions to offer small-dollar credit products that are responsive to customers’ needs and that are underwritten and structured prudently and responsibly.

The FDIC’s prodding follows similar encouragement from the Office of the Comptroller of the Currency (OCC) issued earlier this year.

What happened

The FDIC published a new RFI seeking public input on steps the agency could take to encourage its supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.

“The FDIC recognizes the important role small-dollar credit products can play, as part of the spectrum of credit and savings products offered by banks, in helping consumers meet the need for credit for purposes such as addressing cash-flow imbalances, unexpected expenses or income volatility,” according to the RFI.

Recent research revealed that 20 percent of U.S. households reported their income varied “somewhat” or “a lot” from month to month, the FDIC said, and that nearly 13 percent may have had unmet demand for small-dollar credit from banks.

“While some banks currently offer small-dollar credit products, there may be additional opportunities for banks to address unmet demand for consumer credit in their communities,” the FDIC wrote. “Some of these households may present opportunities for banks to extend credit in the form of small-dollar loans.”

To encourage more banks to enter the small-dollar loan market, the agency asked for input “on the full spectrum of issues related to the role banks can play in offering small-dollar credit, obstacles—regulatory and non-regulatory—that banks currently encounter in offering such credit, and whether there are steps the FDIC could take to enable banks to better serve this market.”

Considering the consumer attitude toward small-dollar lending, the agency wondered whether there is an unmet demand and to what extent both banks and entities outside the banking sector currently meet it. As for the benefits and risks of small-dollar lending to consumers and banks, the FDIC asked how banks can manage or mitigate the risks and what steps the agency could take to encourage financial institutions to develop and offer such products.

In particular, the FDIC asked whether there are any legal, regulatory or supervisory factors that prevent, restrict, discourage or disincentivize banks from offering small-dollar credit products. The RFI also asked for an explanation of any operational, economic, marketplace or other factors that might discourage banks from offering small-dollar credit products or consumers from seeking them.

The FDIC also requested public comment on specific product features or characteristics that might be key to meeting consumer credit needs or ensuring the economic viability of banks offering responsible, prudently underwritten small-dollar credit products. Furthermore, it requested insight into innovation, asking how technology can be leveraged to improve consumer experience and reduce risk, and what role the FDIC should play in supporting innovations for these products.

Comments will be accepted until January 22, 2019.

To read the FDIC’s RFI, click here.

Why it matters

Multiple federal agencies have expressed a clear desire that more banks engage in small-dollar lending, from the OCC’s Bulletin 2018-14 earlier this year, which encouraged banks and federal savings associations to offer short-term, small-dollar investment loans to customers, to the FDIC’s new RFI asking for input on how it can encourage banks to offer such products. However, questions remain for the banking industry, including whether banks can price these loans appropriately for risk while still satisfying regulators’ views as to what constitutes “responsible” terms and “prudent” underwriting for these consumer loans.