Federal regulators urged banks to begin offering small-dollar loans to customers facing financial hardships from the new coronavirus outbreak.
Banks are encouraged to offer open-ended lines of credit, closed-end installment loans, or “appropriately sized” single-payment loans, five regulators said in a two-page guidance document released Thursday.
Most banks have not been offering small-dollar loans in part because of past statements from regulators warning about some products.
“Previous guidance issued by regulators years ago cut off banks’ ability to offer customers short-term liquidity,” said Richard Hunt, the president and chief executive of the Consumer Bankers Association.
The new guidance—from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Reserve, the Consumer Financial Protection Bureau and the National Credit Union Administration—also encouraged banks to work with consumers that fall behind on small-dollar loans, including reducing principal amounts.
The aim is to prevent repeat borrowing and additional debt piling up for consumers facing sudden economic hardships as the U.S. locks down to combat Covid-19, the disease caused by the new coronavirus.
FDIC Chairman Jelena McWilliams and Comptroller of the Currency Joseph Otting have spoken in the past about using the banking system as a way to give consumers a safer option to high-cost payday loans, which often triple-digit annual percentage rates that can leave consumers further in debt.
Staff at the five agencies said they hope banks products will be a a viable alternative to payday loan as the Covid-19 crisis drags on. But the policy is mainly intended to address consumer credit needs rather than enabling banks to market share away from unscrupulous lenders, they said.
Consumer advocates have a mixed view on whether banks should be involved in small-dollar lending. While there is room for banks to offer affordable installment loan products, many consumer advocates worry that banks will return to offering deposit advance loans, which share many characteristics of payday loans.
Thursday’s guidance cracked the door open for payday-style products by listing single-payment loans as an option banks could offer, alongside installment loan options, said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
“It’s just really hard to do a single payment loan that isn’t really, really expensive,” she said.
But a vocal minority of consumer advocates, like the Pew Charitable Trusts, see banks as the only way to get consumers the credit they need at fair terms.
“As long as the credit has reasonable payments and enough time to repay, this ought to be helpful for people,” said Nick Bourke, the director of Pew’s Consumer Finance Project.
FDIC staff said that its existing bulletin cautioning against deposit advance loans remained in place. State-chartered banks would have to follow any and all state interest rate caps and other small-dollar loan protections, the FDIC said.
The OCC lifted its deposit advance guidance in 2017 after the CFPB released a rule mandating payday lenders determine borrowers’ ability to repay a loan before they issue credit. Otting has since issued bulletins encouraging banks to get involved in small dollar lending.
A few have, including Minneapolis-based U.S. Bank, one of the largest depository institutions with more than 70,000 employees and $495 billion in assets as of December 31, 2019. U.S. Bank’s Simple Loan product, a three-month installment loan with a maximum $1,000 value, originally came with a $12 fee, for an APR of around 70%. U.S. Bank on March 13 dropped the fee to $6, making the APR closer to 35%.
Consumer advocates and some Democratic lawmakers are pushing for a maximum 36% interest rate cap on such loans, matching the maximum rate allowed to servicemembers under the Military Lending Act.
The NCUA already allows its member credit unions to offer payday alternative loans, or PALS.
The CFPB is currently reassessing its final payday rule, with the expectation that the ability to repay requirements get removed. A final rule is expected in April.
The FDIC, OCC and Fed have been discussing a broader guidance aimed at getting banks more involved in the small-dollar loan market. The agencies are still working on that guidance, and will release something at a later date.