On May 23, 2018, the Office of the Comptroller of the Currency (“OCC”) issued a bulletin, titled “Description: Core Lending Principles for Short-Term, Small-Dollar Installment Lending” (the “Bulletin”), outlining the OCC’s new stance on short-term, small-dollar installment loan and encouraging national banks, federal savings associations and federal branches and agencies of foreign banks to offer such loan products. The Bureau of Consumer Financial Protection (“BCFP”) Acting Director Mick Mulvaney immediately applauded the OCC’s announcement, calling the entry of national banks and federal savings associations into this $90 billion small-dollar lending market a “win for consumers” that “promote[s] access and innovation in the consumer credit marketplace.”
In the Bulletin, the OCC provided three core lending principles that banks should consider when offering these loan products. First, these lending products should “be consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations.” Second, in offering these loan products, banks should “effectively manage risks associated with the products.” Lastly, banks should employ “reasonable” underwriting policies and practices. Such reasonable policies and practices will, among other things, “promote fair treatment and access” to applicants, “effectively manage credit risk,” and will use “timely and reasonable workout strategies” to avoid applicants experiencing continuous cycles of debt.
Despite the OCC’s and BCFP’s endorsement of these loan products, banks should proceed cautiously. In addition to the regulatory and implementation hurdles associated with bringing these loan products to market, the government’s enforcement practices to ensure these loan products are “consistent with safe and sound banking” and are “underwritten based on reasonable policies and practices” remain unpredictable, as the definition and interpretation of safe and sound banking and reasonable underwriting policies and practices will vary across different jurisdictions, departments and agencies tasked with enforcement.
Remember, the OCC and BCFP may have issued their ringing endorsement of these loan products, but they don’t speak for the potential sources of enforcement that don’t share their excitement. In March, BCFP Director Mulvaney said that states know how to best protect their own consumers and indicated his intent for state regulators and attorneys general to take the lead on enforcing consumer protection laws. It didn’t take states long to act upon BCFP Director Mulvaney’s suggestion. States—and cities for that matter—are filing suits in several states alleging discriminatory lending practices by some of the nation’s largest financial institutions.
In adopting the programs for these loan products, banks need to consider both federal and state laws, such as the Military Lending Act, the varying annual percentage rate (usury) limits adopted by states, and the potential for enforcement actions.
We encourage all banks across the country to consider the regulatory and implementation hurdles and subsequent risks associated with unpredictable sources of enforcement as you weigh the benefit of bringing these loan products to market.
