So, some good news.
For years, banks have wished to offer low-income Americans a small-dollar loan as a more affordable alternative to a payday loan or pawn shop advance. Such loans, though, present high default risk, and regulators have been quick to criticize the terms of any such product as unfair or deceptive. So, while a few banks rolled out a product, activity in this space was generally frozen.
The effort to develop a template that any bank could use for a small-dollar product, and obtain a regulatory safe harbor to prevent a good deed from going punished, began with a group of our CEOs about three years ago. The late Bob Wilmers was the most passionate advocate for this cause, as he was for so many causes, and the CFPB’s approval of his product is a good occasion to remember his numerous contributions to banking. (And don’t get me started about his contributions to winemaking.) Fortunately, after his passing, this particular cause was taken up by Kelly King, Rene Jones and Brian Moynihan, with support of the rest of our board, and entire membership.
We don’t know how many banks will end up offering the product, or whether the regulatory winds will shift against it. But it feels really good to be trying.
Washington, D.C. — The Consumer Financial Protection Bureau (CFPB) today approved a No-Action Letter Template submitted by the Bank Policy Institute (BPI) that would establish the underlying criteria and operating guardrails for a bank to offer small-dollar loan products for amounts of up to $2,500 in the form of an installment loan or line of credit product. The No-Action Letter Template provides for a small-dollar loan product framework that allows banks that apply for a No-Action Letter the flexibility to design their own product, but also provide further information regarding the specific product they intend to offer. New products established under the No-Action Letter Template will feature safety guardrails designed to protect borrowers, such as providing for clear, simple and transparent terms and conditions, and providing parameters for repayment terms and underwriting requirements. Earlier this month, BPI released a research note that compared small-dollar lending products and proposed a design of a responsible small-dollar lending product that would provide temporary liquidity at relatively low cost, with transparent terms that are fully understood by the borrower.
“We hope that banks can use this template to offer affordable loan products to those with unexpected financial needs,” stated BPI President & CEO Greg Baer. “Families unable to pay unexpected expenses should have an alternative to payday lenders and pawnshops, and the CFPB’s no-action relief will allow banks to meet those needs without fear of regulatory sanction. The CFPB’s approval is a helpful signal to consumers that they can turn to their bank when they are in need.”
Banks that wish to take advantage of the No-Action Letter Template are still required to submit a No-Action Letter with the CFPB for any new small-dollar loan product but can base their application on this framework, which outlines the product’s structure, terms, conditions and disclosure requirements. The No-Action Letter Template will allow banks applying for a No-Action Letter to expedite the approval of their product, and also provides the benefit of regulatory clarity for both borrowers and lenders with respect to small-dollar credit products. The CFPB’s announcement follows a joint statement by the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (OCC) establishing core lending principles for a responsible small-dollar loan product.
In 2012, the Pew Research Center found that in the 28 states that permit payday loans, the average APR is 391% or higher. This announcement by the CFPB will increase borrower choices and enable banks to increase their small-dollar loan product offerings to meet the needs of these consumers. The Office of the Comptroller of the Currency estimates that Americans rely on $90 billion in small-dollar loans each year, with individual loan values ranging between $300 to $5,000 each, according to a 2019 statement from the agency. In its statement, the OCC indicated support for banks to re-enter the small-dollar loan product market, citing regulatory actions that forced many banks out of the market. These actions led to a precarious reliance on under-regulated entities, often referred to as “shadow banks.”
About the Bank Policy Institute. The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.