OCC small-dollar lending bulletin: one step forward but one step back?
The OCC has issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.
In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.” The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”
By way of background, the bulletin notes that in October 2017, the OCC rescinded its guidance on deposit advance products because continued compliance with such guidance “would have subjected banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the [CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).”] The guidance had effectively precluded banks subject to OCC supervision from offering deposit advance products. The OCC references the CFPB’s plans to reconsider the Payday Rule and states that it intends 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.” (The statement issued by CFPB Acting Director Mulvaney applauding the OCC bulletin further reinforces our expectation that the CFPB will work with the OCC to change the Payday Rule.)
When the OCC withdrew its prior restrictive deposit advance product guidance, we commented that the OCC appeared to be inviting banks to consider offering the product. The bulletin appears to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers, although it suggests that the products should be even-payment amortizing loans with terms of at least two months. It may or may not be a coincidence that the products the OCC describes would not be subject to the ability-to-repay requirements of the CFPB’s Payday Rule (or potentially to any requirements of the Payday Rule).
The new guidance lists the policies and practices the OCC expects its supervised institutions to follow, including:
- “Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants. Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.”
- “Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk. Such analysis could facilitate sound underwriting for credit offered to consumer who have the ability to repay but who do not meet traditional standards.”
While the OCC’s encouragement of bank small-dollar lending is a welcome development, the bulletin contains potentially troubling language. The OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” also include “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs. 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 entities licensing state(s).” (emphasis added). This statement raises at least two concerns:
- The OCC’s reference to “[l]oan pricing that complies with applicable state laws” is confused (or likely to cause confusion). Federal law (12 U.S.C. Section 85) governs the interest national banks may charge. It authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state. The OCC should clarify that it did not mean to suggest otherwise.
- The OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans. While the context is “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85. The statement in question seems at odds with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision.