OCC Guidance Urging Banks To Offer Small-Dollar Loans Gets Mixed Reaction

WASHINGTON—The Office of the Comptroller of the Currency has issued a new guidance bulletin calling on banks to offer “responsible short-term, small-dollar loans.”

But the guidance is not clear-cut, requiring banks only to offer loans with “reasonable pricing,” and at least one consumer group does not expect it to have much of an effect.

Otting OCC

Joseph Otting

The OCC said the statement should remove regulatory uncertainty around the offerings.

In the statement, Comptroller Joseph Otting said “Millions of U.S. consumers borrow nearly $90 billion every year in short-term, small dollar loans typically ranging from $300 to $5,000 to make ends meet. Consumers should have more choices that are safe and affordable, and banks should be part of that solution.”

Otting said the OCCU was clarifying its position to encourage banks and federal savings associations to provide products to help consumers, including those with “weaker credit histories.”

“By participating in this important space, banks increase the supply and choices available to consumers, which can reduce borrowing costs and have other beneficial market effects,” Otting said

Response from Pew Charitable Trusts

In response, Pew Charitable Trusts praised the OCC, saying millions of American adults, many of whom are low income and have damaged credit, spend more than $30 billion a year to borrow small amounts of money from payday and other high-cost lenders that operate outside the banking system.

Pew said its research has found that, given the opportunity, eight in 10 payday loan borrowers would prefer to get credit from their banks or credit unions.

“Based on years of research and conversations with regulators and bankers, Pew has recommended criteria that new, scalable, and consumer-friendly small-dollar credit products from banks and credit unions should meet,” the organization said.

Credit unions that offer the small-dollar loans have always struggled with pricing low enough to help members while also providing for profitability. Pew said its research indicates that by using automated underwriting and origination to keep their costs low, banks and credit unions can offer small-dollar credit profitably at prices six times lower than average payday loans.

“If banks begin offering these loans according to strong safety standards, it could boost financial inclusion and be a game-changer for the millions of Americans who use high-cost loans today,” said Nick Bourke, director of Pew’s consumer finance project.

The CFA Guidance

The Consumer Federation of America (CFA) said the OCC announcement will not have much of an effect.

“This ambiguous guidance includes some laudable consumer protection principles, but the devil will be in the details,” said Christopher Peterson, financial services director at Consumer Federation of America. “If the OCC does not back up this policy with an aggressive supervision and enforcement program, some greedy banks will try to develop abusive products.”

The CFA said its concerns include:

  • The guidance does not include any explicit limit on interest rates or fees. “Although the guidance requires banks to comply with ‘applicable’ state laws, federal banking law preempts state interest rate caps. Instead, the guidance requires banks to only offer products that have ‘reasonable pricing.’ A super majority of Americans believe loans with interest rates above 36% are unreasonable. OCC examiners must insist that banks protect their reputations by refraining from offering installment loans with effective annual percentage rates in excess of those supported by the American public. OCC examiners should use the 36% rate in the federal Military Lending Act and the Department of Defense’s implementing regulations as benchmark for determining reasonable pricing.”
  • The guidance has an ambiguous commitment to ensuring borrowers have the ability-to-repay their debts. “Some credit products trap borrowers in a high-interest rate cycle where they can only afford interest payments without retiring the loan’s principal balance,” the CFA said. “OCC examiners must insist that banks use underwriting that proves borrowers can quickly repay their bank installment loans without defaulting on other existing obligations like rent, car payments, and child care.”
  • The guidance does not guarantee borrowers a day in court if their bank takes advantage of them. The OCC’s bulletin does not provide a remedy for borrowers to hold banks accountable if they fail to live up to these principles.”
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