On May 23, 2018, the Office of the Comptroller of the Currency (the “OCC”) issued a bulletin encouraging OCC supervised banks to offer short-term, small-dollar installment loans to subprime borrowers who have the ability to repay the loans. The OCC’s position represents a significant change in the role OCC supervised banks can plan in satisfying the short-term credit needs of consumers, including consumers with poor credit histories. The bulletin states that national banks and federal savings associations are uniquely positioned to offer responsible short-term credit products that align with the OCC’s core lending principles. Importantly, the bulletin also lists the following policies and practices that its banks should consider when offering these loan products:
- 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.
- Loan 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 entity’s licensing state(s).
- 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 consumers who have the ability to repay but who do not meet traditional standards.
- Marketing and customer disclosures that comply with consumer protection laws and regulations and provide information in a transparent, accurate, and customer-friendly manner.
- Loan servicing processes that assist customers, including distressed borrowers. To avoid continuous cycles of debt and costs disproportionate to the amounts borrowed, timely and reasonable workout strategies should be used.
- Timely reporting of a borrower’s repayment activities to credit bureaus. Borrowers should have the ability to demonstrate positive credit behavior, build credit history or rebuild credit scores, and transition into additional mainstream financial products.
Given the significant market size of the short-term credit industry, the OCC’s bulletin will likely cause many banks to consider competing with “payday” and other non-bank lenders in the short-term, small-dollar lending market. However, deciding whether or not to offer these credit products will require banks to weigh the significant strategic, credit and compliance risks against the potential profitability of such products. The full text of the OCC’s bulletin is available here.