OCC Says Banks Can Offer Short-Term Loans

Yesterday, in a bulletin titled “Core Lending Principles for Short-Term, Small-Dollar Installment Lending,” the Office of the Comptroller of the Currency (OCC) announced a new policy on short-term, small-dollar loans, which is a shift in agency policy from its position just five years ago.

In a statement regarding the agency’s bulletin, Comptroller of the Currency Joseph Otting noted that “millions of consumers borrow nearly $90 billion every year in short-term, small dollar loans typically ranging from $300 to $5,000 to make ends meet. Consumers should have more choices that are safe and affordable, and banks should be part of that solution.” Many banks had withdrawn from this market, leaving consumers to turn to alternative sources of financing when faced with a short-term financial need.

The new policy reverses a 2013 Obama administration directive that instructed banks to avoid such loans over concerns that customers would be unable to repay them. The bulletin notes that the strategies it outlines “could include working with consumers who have an ability to repay a loan despite a credit profile that is outside of a bank’s typical underwriting standards for credit scores and repayment ratios.”

The OCC published three core lending principles that banks should consider when offering short-term, small-dollar lending products. First, all bank products should be consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations. Second, banks should effectively manage the risks associated with the products they offer, including credit, operational, compliance, and reputation. Finally, all credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements.

“By participating in this important space, banks increase the supply and choices available to consumers, which can reduce borrowing costs and have other beneficial market effects,” Otting said in his statement. “Banks may not be able to serve all of this large market, but they can reach a significant portion of it and bring additional options and more competition to the marketplace while delivering safe, fair, and affordable products that promote the long-term financial goals of their customers.”