OCC Issues Principles for Short-Term, Small-Dollar Installment Lending

In a bulletin released on May 23, 2018, the Office of the Comptroller of the Currency issued core lending principles for short-term, small-dollar installment loans.  According to the bulletin, these loans typically range from $300 to $5,000, span two to 12 months in duration, and feature equal amortizing payments.  This guidance was issued in an effort to encourage financial institutions, which have largely withdrawn from the short-term small-dollar market, to offer such loans in order to meet consumers’ credit needs.

The OCC’s bulletin encouraged banks to: (1) work with consumers who have the ability to repay a loan, but whose credit scores and repayment ratios do not meet a bank’s typical underwriting standards, and to (2) issue products with reasonable pricing and repayment structures.

Strategies suggested for compliant short-term, small-dollar lending include:

• Creating lending products consistent with safe and sound banking;
• Complying with applicable laws and regulations;
• Managing the credit, operational, compliance, and reputational risks associated with offering certain products;
• Establishing guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements;
• Structuring products to support borrower affordability and successful repayment of principal and interest in a reasonable time frame;
• Allowing borrowers to demonstrate positive credit behavior, build credit history, and transition into mainstream financial products;
• Pricing loans in compliance with applicable state laws;
  • In particular, the OCC made clear that an entity should not partner with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state.
• Performing internal and external data analysis to assess a consumers’ creditworthiness and to effectively manage credit risk;
• Issuing legally-compliant marketing and customer disclosures and providing information in a transparent, accurate, and customer-friendly manner; and
• Instituting servicing processes that assist customers, including distressed borrowers.

The OCC advised that these loans—which typically have maturities greater than 45 days and do not include balloon payments—are generally not covered by the CFPB’s Payday Rule and its underwriting requirements.  It also recommended that institutions discuss plans to offer these loans with their OCC portfolio manager, examiner-in-charge, or supervisory office before implementation.