The federal banking agencies recently issued principles to encourage financial institutions to offer small-dollar loans in a responsible manner (the “Small-Dollar Loan Principles”). This interagency guidance clarifies previously conflicting guidance on small-dollar loans by adopting uniform principles for all financial institutions.

The federal banking agencies, which include the Federal Deposit Insurance Corporation, the Federal Reserve Board, the National Credit Union Administration, and the Office of the Comptroller of the Currency, stated that they understood the important role that financial institutions play in meeting their customers’ short-term credit needs, especially in light of the current public health emergency created by COVID-19. The Small-Dollar Loan Principles recognize that financial institutions are well-suited to meet the credit needs of customers due to customers’ temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, national emergencies, or disaster recoveries.

The Small-Dollar Loan Principles provide structure to assist financial institutions to offer responsible small-dollar loans in a manner that is consistent with safe and sound principles, subject to applicable laws. According to the federal banking agencies, these are the three guiding characteristics of a responsible small-dollar loan program:

• A high percentage of customers successfully repaying their small dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligibility, and appropriate underwriting;
• Repayment terms, pricing, and safeguards that minimize adverse customer outcomes, including cycles of debt due to rollovers and reborrowing; and
• Repayment outcomes and program structures that enhance a borrower’s financial capabilities.

The Small-Dollar Loan Principles explain that responsible small-dollar loan programs should be developed in accordance with the financial institution’s overall business plan and in accordance with sound risk management principles. To accomplish this, financial institutions may choose to utilize innovative technology processes. Institutions may also partner with a third party to offer the loan products, provided that the third party relationship is effectively managed.

Three core lending principles were set forth for financial institutions that offer small-dollar loan products. These include:

• Loan products that are consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations.
• Financial institutions effectively manage the risk associated with the products they offer, including credit, operational, and compliance.
• Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing, and repayment requirements.

Finally, the Small-Dollar Loan Principles state that financial institutions that offer responsible small-dollar loans should have policies, procedures, and controls that address the following: loan structure; loan pricing; loan underwriting; loan marketing and disclosures; and loan servicing and safeguards.