On May 20, 2020, the federal financial institution regulatory agencies—the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—issued principles for responsibly offering small-dollar loans in order to meet consumers’ growing short-term credit needs.In the interagency statement of principles, the agencies recognized “the important role that responsibly offered small-dollar loans can play in helping customers meet their ongoing needs for credit from temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, natural disasters, or other extraordinary circumstances such as the public health emergency created by COVID-19.” The lending principles are therefore intended to “encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes.”The guidance explains that small-dollar loan programs should generally reflect the following characteristics:
- A high percentage of customers successfully repaying their small dollar loans in accordance with original loan terms, which is 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 reborrowing; and
- Repayment outcomes and program structures that enhance a borrower’s financial capabilities.
Moreover, the agencies set forth core lending principles for financial institutions intending to offer small-dollar loan products:
- 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; and
- Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing, and repayment requirements.
The guidance also explained that “reasonable loan policies and sound risk management practices and controls for responsible small-dollar lending would generally address” loan structures, loan pricing, loan underwriting, loan marketing and disclosures, and loan servicing and safeguards.
Finally, the agencies recognized that technology-enabled alternative underwriting could have a place in a well-managed small dollar lending program and that such a program could be implemented by a bank directly or through “effectively managed third-party relationships.” Citing to prior guidance on these topics generally, the agencies did not provide additional detail aimed at small dollar programs.
We have also described the separate action undertaken by the Consumer Financial Protection Bureau to approve a template that depository institutions may use to obtain a no-action letter that addresses the application of the Dodd-Frank Act’s prohibition on unfair, deceptive, and abusive acts and practices to described aspects of their particular small-dollar lending products.