Banks Seek Clear Rules As They Review Small Dollar Loan Expansion | Techy Kings

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

US Bancorp, Bank of America Corp., Wells Fargo & Co. and four other retail banks in the US have begun issuing, or announced plans to introduce, flat-fee, small-dollar installment loans since 2018, according to the Pew Charitable Trusts’ Consumer Finance Project. Usually issued between $100 and $1,000, they are intended to help consumers when they face unexpected expenses and can be an alternative to high-interest payday and other high-cost loans.

But regulatory uncertainty and financial regulators’ changing views on the suitability of previous product iterations have made banks, especially smaller ones, nervous about entering the business. If more banks take the plunge and roll out these loans, they could help diversify small-dollar loan options for consumers trying to avoid debt traps, consumer advocates say.

“Banks are concerned about regulators changing 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 confident about the product as it is currently designed. The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency said they don’t see a problem with low-cost, small-dollar loans at banks.

In 2020, the CFPB issued, though later rescinded, a broad no-action letter to the Bank Policy Institute, pledging to refrain from enforcement action if banks followed certain models of small-dollar lending.

Bank of America worked closely with the CFPB to design its products, and obtained the agency’s no-action letter in November 2020. The no-action letter—which is the bureau’s stamp of approval and a model for other banks to follow—remains in effect, an agency spokeswoman said.

“The CFPB has no specific concerns about this product and continues to engage with banks that issue small dollar loans,” a 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 loans. Regulators also plan to give banks credit under the Community Reinvestment Act for issuing such loans.

An OCC spokesman said the agency “has long encouraged banks to offer fair and responsible small-dollar loans to consumers to help them meet ongoing or emergency needs for credit with reasonable fees and repayment terms.”

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

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

“The consumer demand is there. Regulatory certainty is there. Their competitors are in the market,” said Alex Horowitz, principal officer at the Pew Charitable Trusts’ Consumer Finance Project. “So it makes sense for other big banks to get into that space as well.”

‘Doubtful’ Industry

Still, banks want to see more clarity from regulators before experimenting further with loans, industry observers said.

The Government Accountability Office found in a February report that banks are “hesitating to offer such loans in part because of changes in relevant regulations or guidance in recent years.”

Some banks offered deposit advance loans—which carry interest rates lower than payday loans but higher than the small-dollar loan rates currently offered by US Bank and Bank of America—until 2014. They stopped because the FDIC and OCC both issued guidance which raises concerns about the product.

There are some questions about the regulator’s posture on small dollar loans.

The CFPB rescinded the BPI ban as part of a broad overhaul of its innovation policy.

The CFPB’s existing rules restricting payday loans are under discussion. Once the legal battle is over, financial regulators could take other changes to payday loan restrictions that could sweep some bank products.

Instant Cash

Meanwhile, some big banks are moving forward. Working closely with regulators, US Bank launched Easy Loans in 2018. This product allows customers to borrow between $100 and $1,000 which will be repaid in three equal monthly installments. Customers are initially charged $12 for every $100 borrowed.

US Bank conducts a quick review of customer account activity before approving a loan. Borrowers are prohibited from taking out a second Easy Loan until 30 days after they repay the outstanding loan in full, a move to prevent customers from overusing the product.

In comparison, payday loans do not have similar rollover protections, causing some borrowers to inevitably fall into debt.

“I don’t want people to be in a situation where people need this cash immediately. But if they’re there, we want to support them,” said Tim Welsh, the Minneapolis-based bank’s vice chairman of consumer and business banking.

A US Bank study in September showed that 58% of borrowers use Easy Loans to cover unexpected expenses, such as car repairs.

Bank of America introduced its Balance Assist product in December 2020. The company said that 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 either started offering or have plans for small installment loans.

Consumer advocates say bank products such as Easy Loans are a better alternative to higher-cost forms of credit.

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

stepping stone

Beyond regulatory issues, some banks may also hold back from following their larger rivals due to cost concerns.

Establishing lending and underwriting programs as well as loan servicing creates significant costs for banks, especially for loans that do not generate significant profits, Calem said.

But as the program gets up and running, costs can come down.

In September, US Bank cut Easy Loan fees in half, down to $6 for every $100 borrowed.

And while the small-dollar loan itself isn’t profitable, it can be a stepping stone to other, more expensive products, US Bank’s Welsh said.

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

“At scale, it will save millions of borrowers billions of dollars,” he said.

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