By Lydia Beyoud
National banks now have the backing of a key regulator to ramp up offering short-term, small-dollar installment loans, according to a May 23 bulletin from the Office of the Comptroller of the Currency.
The guidance encourages banks to offer installment loans to consumers with nonprime credit scores and higher debt-to-income ratios, but who still have the ability to make payments. Such loans differ from payday loans in that they typically have payback periods ranging from two to 12 months with equal amortizing payments.
The bulletin is intended to be the signal national banks have been waiting for to return to the small-dollar lending space after a five-year hiatus, Comptroller Joseph Otting told reporters during a May 23 press call.
“I’m very encouraged. I do think this fills a need that is available and needed in today’s world,” Otting said.
The installment loan market for banks could be significant. U.S. consumers borrow nearly $90 billion annually in short-term, small-dollar loans, averaging between $300 and $5,000, according to the Center for Financial Services Innovation.
Banks may not be able to serve the entire market, but installment loans issued under the bulletin’s parameters would address approximately 80 percent to 90 percent of the market, Otting said.
Encouraging small-dollar lending is one of Otting’s three core policy initiatives, along with revisiting Community Reinvestment Act requirements for banks and strengthening Bank Secrecy Act and anti-money laundering compliance.
With Otting telegraphing his interest in encouraging small-dollar lending, some national banks may already have a head start in evaluating how to establish new loan products.
Minneapolis-based U.S. Bank said the OCC guidance will help it “develop products and services to meet the needs of consumers, particularly those who are currently outside the banking system,” spokesman Greg Vadala told Bloomberg Law.
There’s likely to be a healthy appetite within the banking sector to offer small-dollar loans, according to Ed Mills, public policy analyst at Raymond James, a financial advisory company. The administration changeover among financial services regulators should give enough certainty for banks to return to the products or explore other types of uncollateralized consumer loans, Mills told Bloomberg Law.
Banks and financial institutions largely withdrew from offering deposit advance products, a form of short-term, small-dollar loans, following 2013 OCC guidance indicating it disfavored those products.
As the availability of lower-cost bank loans dried up, more consumers turned to payday and auto title lenders, which typically have higher fees and interest rates, consumer advocates have said.
More than 12 million Americans take out payday loans every year, spending more than $9 billion on loan fees, according to a 2016 Pew Charitable Trusts study.
Bank-offered installment loans can help consumers break out of cycles of debt and access more traditional banking products, Otting said.
The new bulletin underscores core lending principles for consumer fairness and safe and sound lending practices.
The OCC’s guidance should help consumers access safe, affordable small-dollar installment loans, Nick Bourke, director of Pew Charitable Trusts’ consumer finance project, said in a statement.
“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,” Bourke said.
“We encourage the other federal bank and credit union regulators to follow the Comptroller’s lead and institute the necessary standards to ensure the development of safe and affordable small installment loans that will save millions of borrowers billions of dollars a year,” Bourke said.
The Trump-led Consumer Financial Protection Bureau welcomed the OCC’s guidance. CFPB acting Director Mick Mulvaney said the bureau will participate in efforts “to promote access and innovation in the consumer credit marketplace.”
“Millions of Americans desperately need access to short-term, small-dollar credit,” Mulvaney said in a statement. “We cannot simply wish away that need. In any market, robust competition is a win for consumers.” Credit unions may also get into the small-dollar lending game. The National Credit Union Administration board plans to vote May 24 on a notice of proposed rulemaking for an alternative to payday loans.
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