Federal regulators want more banks to offer small-dollar loans, but the industry sees a lack of firmer guidance as a barrier to widespread action beyond a few products from large banks.
But regulatory uncertainty and financial regulators’ shifting views on the suitability of the product’s previous iterations have made banks, particularly smaller ones, jittery about getting into the business. If more banks become reassured and launch these loans, they could help diversify the small-dollar loan options for consumers trying to avoid a debt trap, consumer advocates say.
“Banks are concerned about regulators changing their minds about whether these programs are helpful or harmful to consumers,” said Paul Calem, the director of research at the Bank Policy Institute, a banking industry trade group.
Industry regulators say they’re sanguine about the products as they’re currently designed. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency said that they saw no problems with low-cost, small-dollar lending at banks.
In 2020, the CFPB issued, though later rescinded, a broad no-action letter to the Bank Policy Institute, promising to refrain from enforcement actions if banks followed a certain model of small-dollar lending.
Bank of America worked closely with the CFPB to design its product, and earned an agency no-action letter in November 2020. The no-action letter—which was the bureau’s stamp of approval and a model for other banks to follow—remains in effect, an agency spokesman said.
“The CFPB has no specific concerns about these products and continues to engage with banks that issue small-dollar loans,” the CFPB spokesman said.
The OCC, along with the Federal Deposit Insurance Corp. and the Federal Reserve, released a joint policy statement in May 2020, encouraging banks to offer responsible small-dollar loans. The regulators also are proposing to give banks credit under the Community Reinvestment Act for issuing such loans.
An OCC spokesman said the agency “has long encouraged banks to offer fair and responsible small-dollar loans to consumers to help them meet ongoing or emergency needs for credit with reasonable fees and repayment terms.”
The FDIC and the Fed didn’t immediately respond to requests for comment.
Consumer advocates say they hope that more banks will offer payday loan alternatives as the regulatory picture clears.
“The consumer demand is there. The regulatory certainty is there. Their competitors are in the marketplace,” said Alex Horowitz, the principal officer at the Pew Charitable Trusts Consumer Finance Project. “So it would make sense for other large banks to get into the space, too.”
Still, banks want to see even more clarity from regulators before experimenting further with the loans, industry watchers say.
The Government Accountability Office found in a February report that banks “are hesitant to offer such loans in part because of changes to related rules or guidance in recent years.”
Several banks offered deposit advance loans—which carried interest rates lower than payday loans but higher than the rates of small-dollar loans currently offered by US Bank and Bank of America—until 2014. They stopped because the FDIC and OCC both issued guidance raising concerns about the product.
There are some questions about regulators’ posture on small-dollar lending.
The CFPB rescinded the BPI no-action letter as part of a broad overhaul of its innovation policies.
The CFPB’s existing rules restricting payday lending are currently being litigated. Once the legal battle is over, the financial regulator could take another swing at payday lending restrictions that could sweep up some bank products.
Meanwhile, several large banks are moving ahead. Working closely with regulators, US Bank launched Simple Loan in 2018. The product allows customers to borrow between $100 and $1,000 that would be repaid in three equal monthly installments. Customers were initially charged $12 for every $100 borrowed.
US Bank conducts rapid checks of customers’ account activity before approving the loan. Borrowers are barred from taking out a second Simple Loan until 30 days after they repay an outstanding one in full, a measure to prevent customers’ from overusing the product.
In comparison, payday loans have no similar rollover protections, leading some borrowers to fall into unescapable debts.
“I don’t want people to be in a situation where people need this cash urgently. But if they are there, we want to support them,” Tim Welsh, the Minneapolis-based bank’s vice chairman for consumer and business banking, said.
US Bank’s study in September showed that 58% of borrowers used Simple Loans to cover unexpected expenses, such as auto repairs.
Bank of America introduced its Balance Assist product in December 2020. The company said that it had issued 100,000 Balance Assist loans between December 2020 and September 2021.
Huntington Bank, Wells Fargo & Co., Regions Bank, Truist and KeyBank also have either begun offering or have plans for small installment loans.
Consumer advocates say bank products like the Simple Loan are a better alternative to higher-cost forms of credit.
“With the caveats of strong consumer protections with these loans, we think it can be a really viable option for a lot of people,” said Rachel Gittleman of the Consumer Federation of America.
Beyond regulatory issues, some banks also may be holding back on following their large competitors due to cost concerns.
Creating a lending program and underwriting and servicing loans pose significant costs to a bank, particularly for loans that don’t generate a significant profit, Calem said.
But once a program is up and running, costs can go down.
In September, US Bank slashed the Simple Loan fee by half, down to $6 for every $100 borrowed.
And even if small-dollar loans aren’t profitable themselves, they can serve as a steppingstone to other, more expensive products, US Bank’s Welsh said.
An increase in small-dollar lending at banks could be a boon for consumers who are seeking an alternative to expensive payday loans and other high-cost credit, Horowitz said.
“At scale, it would save millions of borrowers billions of dollars,” he said.