By Jon Hill

Law360 (March 26, 2020, 7:40 PM EDT) -- Federal regulators said Thursday banks should think about providing small-dollar loans to help cash-strapped consumers during the coronavirus pandemic, guidance that consumer advocates say opens the door to predatory lending at the "worst possible time."

In a statement, the Federal Reserve and other federal banking agencies said they're encouraging the financial institutions they supervise to offer small-dollar loans for consumers and small businesses affected by the COVID-19 public health emergency, which has triggered widespread job losses and sent the U.S. economy spiraling toward recession.

The agencies said current rules allow banks and credit unions to engage in "responsible" small-dollar lending and that these loan products could include things like open-end credit lines, installment loans or even "appropriately structured single-payment loans."

"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 shortfalls during periods of economic stress or disaster recoveries," the regulators said.

The Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration and Consumer Financial Protection Bureau joined the Fed in issuing the statement on small-dollar lending, which drew swift opposition from an array of public-interest groups.

"This is the worst possible time for banks to make predatory payday loans," the National Consumer Law Center, Center for Responsible Lending and several other organizations said in a joint statement. "Government regulators have opened the door for banks to exploit people, rather than to help them."

Banks have largely steered clear of the small-dollar lending market since it was frowned on by regulators during the Obama administration, but Trump-appointed regulators have tilted in the opposite direction. In 2018, for example, the OCC released guidance urging the banks under its supervisory umbrella to consider rolling out "short-term, small-dollar installment loans," and the FDIC has also expressed interest in the idea of banks offering small-dollar loans.

That's created some anxiety among consumer advocates, who have previously stressed the need for strong standards so banks don't turn into payday lenders and offer high-cost credit that creates "debt traps," where unaffordable loan terms lead consumers to get stuck in repeated cycles of new borrowing to pay off old borrowing.

But Thursday's statement leaves room for banks to veer off into that territory at a time when many consumers will be particularly vulnerable, according to Rebecca Borné, senior policy counsel for the Center for Responsible Lending.

"We think this guidance is bad news," Borné told Law360. "Banks who may have been looking to make payday loans will take it as a green light."

Borné took particular issue with the statement's reference to single-installment loans, which can mirror the structure of payday loans. Given many consumers will face prolonged income reductions and financial hardship from the upheaval caused by the pandemic, having to pay back a loan all at once is likely to be much more of a strain on affected borrowers, according to Borné.

"What people are going to need is time to repay in affordable installments," Borné said. "A sustained period of distress is the last scenario where a single-payment loan makes sense."

Lauren Saunders, associate director of the National Consumer Law Center, similarly warned that the single-payment structure highlighted by the agencies won't serve borrowers well.

"This crisis will last longer than two weeks, and balloon-payment bank payday loans just leave a hole in the next paycheck when a family's financial situation will only be worse," Saunders said in a statement.

The agencies acknowledged in their statement that some small-dollar loan customers may run into trouble with repayment as a result of "unexpected circumstances." In those situations, financial institutions "should consider workout strategies designed to help enable the borrower to repay the principal of the loan while mitigating the need to re-borrow," the agencies said.

But Borné said the statement doesn't specify that banks should consider repayment ability before making the loan in the first place, nor does it provide any guidelines on how much banks should charge for their small-dollar loans, like suggesting a 36% maximum interest rate on par with the legal limit for most consumer loans to military servicemembers.

"We are really calling on banks to do the right thing," Borné said. "There's no reason for banks to believe high interest-rate loans are going to help people right now. The banks are getting a really good deal on their own money from the government, and they need to turn around and treat their customers fairly."

Although Thursday's statement was framed as a response to the COVID-19 crisis, federal regulators said they believe there's a role for banks in small-dollar lending after the pandemic is over and signaled more developments may be coming.

"The agencies are working on future guidance and lending principles for responsible small-dollar loans to facilitate the ability of financial institutions to more effectively meet the ongoing credit needs of their communities and customers," the statement said.

--Editing by Janice Carter Brown.

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