[co-author: James Stevens]*
On May 20, the OCC, the FDIC, the Federal Reserve Board and the National Credit Union Administration issued “Interagency Lending Principles for Offering Responsible Small-Dollar Loans.” This new guidance follows close on the heels of the agencies’ March 30 “Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19,” in which the banking agencies noted “the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income short-falls during periods of economic stress or disaster recoveries.” This acknowledgement of the critical need for small-dollar lending is repeated verbatim at the outset of the Interagency Lending Principles, which provide further details on what “responsible” small-dollar lending entails. To this end, the new principles replace or modify several existing federal bank agencies’ bulletins, including OCC Bulletin 2018-14, “Installment Lending: Core Lending Principles for Short-Term, Small-Dollar Installment Lending,” which is rescinded and replaced in its entirety.1
The Interagency Lending Principles represent a material change in position with respect to one of the “core” policies stated in OCC Bulletin 2018-14. Namely, Bulletin 2018-14 described “responsible” short-term, small-dollar loans as being “typically two to 12 months in duration with equal amortizing payments.” Conversely, the new guidance provides that “[r]easonable loan policies and sound risk management practices and controls for responsible small-dollar lending” could include loans with “shorter-term single payment structures,” which would necessarily have durations of one month or less.
Furthermore, although the Interagency Lending Principles repeat verbatim the supervisory expectation contained in Bulletin 2018-14 that “loan pricing should comply with applicable state laws and reflect overall returns reasonably related to product risks and costs,” the new guidance omits the very limiting concept that the “OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” Given that the FDIC made the identical assertion in its December 2019 proposed rulemaking regarding the valid-when-made doctrine, the agencies’ failure to include this admonition in their new, jointly issued guidance is significant. We believe it signals a more welcome general posture toward third-party programs involving small-dollar, short-term loan programs. In this regard, the Interagency Lending Principles welcome these programs if they are offered through “effectively managed third-party relationships.” Furthermore, although a loan program undertaken with the “sole goal” of evading state law would be at odds with such a program, we struggle to envision any program where the parties’ only objective would be to circumvent state law. For example, the federal bank agencies recently highlighted the need for making short-term loans available for the purpose of assisting consumers adversely affected by the COVID-19 crisis, and the offering of any loan product is necessarily largely driven by customer demand. At a minimum, going forward, no federal banking agency should assume an improper motive exists for any third-party program, including a “bank sponsor” lending program,2 based on the nature of the loans being offered.
In considering the differences between OCC Bulletin 2018-14 and the new Interagency Lending Principles, it is important to keep in mind that the OCC’s bulletin was issued with the expressly noted expectation that the CFPB would soon be implementing its final rule governing Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Payday Rule). As originally adopted, the final Payday Rule created comprehensive, intentionally difficult-to-satisfy3 rules covering most forms of short-term consumer installment loans, including any loan with a term of 45 days or less. Hence, the OCC’s stated preference in Bulletin 2018-14 for short-term, small-dollar installment loans with terms of at least two months’ duration should be viewed in light of the OCC’s stated desire to “work with the [CFPB] and other stakeholders to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.” Now that it has become clear that the CFPB plans to rescind all but the payments-related portions of the Payday Rule, it makes sense that the OCC would reevaluate its stance toward short-term consumer installment loans with durations of 45 days or less, including single-payment loan products.
- The Interagency Lending Principles represent the latest addition to an expanding body of federal bank agency guidance encouraging banks to consider making small-dollar, short-term consumer installment loans. For national banks in particular, the principles expand the types of consumer installment loans that banks should feel comfortable offering, including to consumers impacted by the COVID-19 pandemic.
- The new principles invite banks to consider offering small-dollar, short-term loans through “effectively managed third-party relationships. For additional information regarding specific types of relationships that may be available, please see our recent alert, “Heeding Bank Agencies’ Call for Increased Small Dollar Lending Through Fintech Relationships.”
- The fact that the Interagency Lending Principles do not include a warning to banks regarding the inappropriateness of entering into relationships with nonbank third parties with “the sole goal of evading a lower interest rate established under the law of the [nonbank] entity’s licensing state(s)” should not be misinterpreted as extending a welcome mat to these relationships. However, coupled with other recent guidance, the federal bank agencies should be interpreted as signaling a more welcome posture toward third-party relationships involving the making and servicing of short-term and/or small-dollar loans, particularly relating to national banks.
1 The FDIC announced that it is rescinding and replacing its 2007 guidelines (FIL-50-2007) and its 2013 guidance (PR-105-2013) with the interagency guidance. In addition, the FDIC will make technical and conforming changes to its 2015 guidelines (FIL-52-2015). The latter FIL stated, in pertinent part regarding payday and other short-term loan products, that “[f]inancial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws.”
2 A third-party relationship in which an insured bank makes loans and then sells those loans, or related loan receivables, to a nonbank lender that provides loan origination and account servicing.
3 The CFPB has expressly acknowledged that the soon-to-be rescinded underwriting requirements of the Payday Rule would have made such loans much less common. 84 Fed. Reg. 27907, 27915 (June 17, 2019).
* Troutman Sanders