Banks seek clear rules while eyeing expansion of low-cost lending

Federal regulators want more banks to offer small loans, but the industry sees the lack of firmer guidance as a barrier to widespread action beyond a few big-bank products.

American bank, Bank of America Corp., Wells Fargo & Co. and four other U.S. retail banks began issuing, or announced plans to introduce, low-value, lump-sum installment loans since 2018, according to the Pew Charitable Trusts Consumer Finance Project. Typically issued between $100 and $1,000, they are intended to help consumers when faced with an unexpected expense and can serve as an alternative to high interest payday loans and other low cost loans. raised.

But regulatory uncertainty and shifting opinions from financial regulators on the suitability of previous iterations of the product have made banks, especially smaller ones, nervous about getting into the business. If more banks step up and roll out these loans, they could help diversify low-end loan options for consumers trying to avoid the debt trap, consumer advocates say.

“Banks are concerned that regulators will change their minds about whether these programs are helpful or harmful to consumers,” said Paul Calem, director of research at the Bank Policy Institute, a banking industry trade group.

Industry regulators say they are optimistic about the products as they are currently designed. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency said they saw no problem with low-cost, low-value loans at banks.

In 2020, the CFPB issued, although later rescinded, a broad no-action letter to the Bank Policy Institute, promising to refrain from taking enforcement action if banks followed a certain lending model of small dollars.

Bank of America worked closely with the CFPB to design its product and obtained a No Action Letter from the agency in November 2020. The No Action Letter – which was the bureau’s stamp of approval and a model for other banks to follow – remains in effect, a spokesman for the agency said.

“CFPB has no specific concerns with these products and continues to engage with banks that provide small loan amounts,” the CFPB spokesperson said.

The OCC, along with the Federal Deposit Insurance Corp. and the Federal Reserve, issued a joint policy statement in May 2020, encouraging banks to offer responsible small-dollar lending. Regulators are also proposing to give banks credit under the Community Reinvestment Act for issuing such loans.

An OCC spokesperson said the agency “has long encouraged banks to offer fair and responsible small-dollar loans to consumers to help them meet routine or urgent credit needs with fees and conditions. reasonable refunds”.

The FDIC and the Fed did not immediately respond to requests for comment.

Consumer advocates say they hope more banks offer payday loan alternatives as the regulatory picture clears.

“The consumer demand is there. The regulatory certainty is there. Their competitors are in the market,” said Alex Horowitz, senior director of the Pew Charitable Trusts Consumer Finance Project. “So it would make sense for other big banks to enter the space as well.”

“Hesitant” industry

Still, banks want to see even more clarity from regulators before experimenting more with lending, say industry watchers.

The Government Accountability Office found in a February report report that banks “are hesitant to offer such loans in part because of changes in related rules or guidelines in recent years”.

Several banks offered deposit loans — which carried lower interest rates than payday loans but higher than the small loan rates currently offered by U.S. Bank and Bank of America — until 2014. They stopped because both the FDIC and the OCC have issued guidance raising concerns. on the product.

There are some questions about the regulators’ stance on small dollar loans.

The CFPB has rescinded BPI’s no-action letter as part of a major overhaul of its innovation policies.

Existing CFPB rules restricting payday loans are currently the subject of litigation. Once the legal battle is over, the financial regulator could take another turn in payday loan restrictions that could sweep away some banking products.

Urgent cash

Meanwhile, several major banks are moving forward. Working closely with regulators, US Bank launched Simple Loan in 2018. The product allows customers to borrow between $100 and $1,000 which would be repaid in three equal monthly installments. Customers initially had to pay $12 for every $100 borrowed.

US Bank performs quick checks of customer account activity before approving the loan. Borrowers are not allowed to take out a second simple loan until 30 days after paying off the outstanding amount in full, a measure to prevent customers from overusing the product.

By comparison, payday loans lack similar rollover protections, leading some borrowers to fall into unavoidable debt.

“I don’t want people to find themselves in a situation where people urgently need this money. But if they’re there, we want to support them,” said Tim Welsh, the Minneapolis-based bank’s vice president for personal and business banking.

The US Bank study in September showed that 58% of borrowers used simple loans to cover unexpected expenses, such as car repairs.

Bank of America launched its Balance Assist product in December 2020. The company said it issued 100,000 Balance Assist loans between December 2020 and September 2021.

Huntington Bank, Wells Fargo & Co., Regions Bank, Truist and KeyBank have also started offering or have plans for small installment loans.

Consumer advocates say banking products like Simple Loan are a better alternative to more expensive forms of credit.

“With the caveats of strong consumer protections with these loans, we think this can be a really viable option for a lot of people,” said Rachel Gittleman of the Consumer Federation of America.

Springboard

Beyond regulatory issues, some banks may also refrain from following their larger competitors due to cost concerns.

Creating a loan program and underwriting and servicing loans entails significant costs for a bank, especially for loans that do not generate meaningful profits, Calem said.

But once a program is up and running, costs can come down.

In September, US Bank cut simple loan fees in half, to $6 for every $100 borrowed.

And while small dollar loans aren’t profitable on their own, they can serve as a stepping stone to other, more expensive products, US Bank’s Welsh said.

An increase in small-dollar lending at banks could be a boon for consumers looking for an alternative to expensive payday loans and other high-cost credit, Horowitz said.

“On a large scale, this would save millions of borrowers billions of dollars,” he said.

Rosemary C. Kearney