Short-Term Lending: Think Small, as OCC Nudges Banks

Financial Services Law

Not long after the CFPB’s acting director put the brakes on tough payday lending rules, the Trump administration likewise signaled that banks should move back into the $90 billion business.

What happened

Seeking to encourage national banks and federal savings associations to offer responsible short-term, small-dollar installment loans, the Office of the Comptroller of the Currency (OCC) released Bulletin 2018-14: “Core Lending Principles for Short-Term, Small-Dollar Installment Lending.”

Many banks have withdrawn from the short-term, small-dollar installment lending market, the OCC noted, resulting in consumers turning to alternative lenders. But banks should wade into the market—where loans of two to 12 months’ duration with equal amortizing payments typically range from $300 to $5,000—for the benefit of the financial institution as well as consumers.

“Banks can provide affordable short-term, small-dollar investment lending options that can help consumers with their short-term financial needs while establishing a path to more mainstream financial products,” according to the Bulletin. “Banks can meet consumers’ short-term, small-dollar needs while providing other financial services such as financial education and credit reporting. Consumers can also benefit when they are offered products with reasonable pricing and repayment structures.”

The OCC noted that installment lending products with maturities greater than 45 days that do not include balloon payments are generally not covered by the Consumer Financial Protection Bureau’s (CFPB) Payday, Vehicle Title and Certain High-Cost Installment Loans Rule.

Banks “can offer these loans safely, profitably and with reasonable pricing and repayment terms,” the OCC said, highlighting three core lending principles: 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; and all credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing and repayment requirements.

Specific to short-term, small-dollar investment products, the OCC said loan amounts and repayment terms should align with eligibility and underwriting criteria as well as 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, the agency said.

Loan pricing needs to comply with applicable state laws and reflect overall returns reasonably related to product risks and costs, the OCC wrote, noting that it takes an unfavorable view of “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).”

Another reasonable policy would base analysis on internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and effectively manage 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,” according to the Bulletin.

Marketing and customer disclosures should comply with consumer protection laws and regulations, providing information in a transparent, accurate and customer-friendly manner, while loan servicing processes should aim to assist customers, including distressed borrowers, the OCC said. To avoid continuous cycles of debt and costs disproportionate to the amounts borrowed, timely and reasonable workout strategies should be utilized.

Banks need to make timely reports of a borrower’s repayment activities to the credit bureaus, offering borrowers the ability to demonstrate positive credit behavior, build credit history or rebuild their credit score, and transition into additional mainstream financial products, the OCC explained.

“Banks may not be able to serve all of this large market, but they can reach a significant portion of it and bring additional options and more competition to the marketplace while delivering safe, fair and affordable products that promote the long-term financial goals of their customers,” Comptroller of the Currency Joseph Otting said in a statement.

Acting director of the CFPB Mick Mulvaney praised the Bulletin. “Millions of Americans desperately need access to short-term, small-dollar credit,” he said in a statement. “We cannot simply wish away that need. In any market, robust competition is a win for consumers. 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.”

Why it matters

Although the Bulletin was welcome news for financial institutions seeking to offer installment loans, it faced brief controversy after some in the industry expressed concern about the OCC’s statement that it views “unfavorably” entities that partner with a bank to evade a lower interest rate established by state law. But a senior OCC official attempted to put out the fires on a press call, according to Bloomberg news, stating that the language did not reflect a negative view of bank partnerships with fintech lenders. Instead, the Bulletin meant to reference its opposition to “rent-a-bank” deals involving nonbank lenders partnering with a national bank solely to avoid state usury laws. Such sham partnerships would face problems, the official explained, while bona fide partnerships between banks and fintech lenders or other nonbank partners remain in favor. How many federally chartered financial institutions will take advantage of the guidance provided by this Bulletin also remains to be seen.



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