Banking Regulators Issue Small-Dollar Lending Guidelines

By Emilie Ruscoe
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Law360 (May 20, 2020, 10:02 PM EDT) -- Federal banking regulators issued guidance on Wednesday for responsibly offering small-dollar loans to meet consumers' short-term credit needs as the nation grapples with the economic fallout from the coronavirus pandemic.

The four agencies told lenders they should be offering thoughtfully structured loans, with totals and repayment structures tailored to work for borrowers. Lending practices should be equitable and evidence-based and should reflect the bank's own risks and costs, and could utilize automation and other new technologies to lower lending costs, the federal agencies said.

Banks are also expected to make it clear to their clients that they are following applicable consumer protection laws, and should have resources in place to help clients who find themselves struggling with repayment.

The team of regulators, comprising the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency, issued the recommendations in a four-page document that generally laid out the principles that banks, savings associations and credit unions can look to as they work with both individuals and small businesses that have been hard hit by the pandemic.

"The agencies recognize the important role that responsibly offered small-dollar loans can play in helping customers meet their ongoing needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, national emergencies, or disaster recoveries," the regulators said Wednesday, reiterating encouragement they gave banks March 26 in the early days of the pandemic response.

Small-dollar lending was frowned on by regulators during the Obama administration, and the practice has been likened by consumer advocates to providing small, high-interest payday loans.

But the regulators on Wednesday told financial institutions that "well-designed small-dollar lending programs can result in successful repayment outcomes that facilitate a customer's ability to demonstrate positive credit behavior and transition into additional financial products," and noted that existing regulatory framework doesn't prevent banks and other lenders from offering such loans.

The regulators said that some hallmarks of good small-dollar lending programs include a majority of customers successfully repaying their loans in ways that enhance their financial capabilities and safeguards, fair pricing and other terms that keep borrowers from defaulting or reborrowing.

"Financial institutions seeking to develop new programs or expand existing responsible small-dollar lending programs should do so in a manner consistent with sound risk management principles, inclusive of appropriate policies," the regulators said. "Well-managed programs will generally align with the financial institution's overall business plans and strategies."

At least one good banking advocacy organization sounded the alarm regarding the recommendations on Wednesday.

In a statement emailed to Law360, Rebecca Borné, senior policy counsel at the Center for Responsible Lending, cautioned that the pandemic has been "economically devastating for many Americans."

"Banks would be wrong to exploit this desperation and to use today's guidance as an excuse to reintroduce predatory loan products. There is no excuse for trapping people in debt," she added.

The organization characterized the recommendations from regulators as the latest example of a trend toward weakened consumer protections.

In particular, the center highlighted that also on Wednesday, the FDIC set aside its advice to the banks it supervises that they not issue loans with annual interest rates higher than 36 percent.

She also said that banks are currently borrowing money at 0% annual interest, which she suggested might play a factor in how lenders determine the costs and risks associated with their lending programs.

The latest jobs report, from May 8, showed the national unemployment rate was 14.7 percent, a figure not seen since the Great Depression, and economists expect Bureau of Labor Statistics reporting on Thursday to show millions of jobs losses in the last week alone. The latest available data shows jobless claims since mid-March have sailed past 36 million.

--Editing by Michael Watanabe.

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