Banks Still Hesitant To Offer Small-Dollar Loans Due to Regulatory Risk

While several major retail banks in the United States—including US Bancorp, Bank of America Corp., Wells Fargo & Co., and four others—are now issuing or have announced plans to issue flat-fee, small-dollar installment loans, others remain hesitant to offer similar products.

According to a report in Bloomberg Law, “regulatory uncertainty and financial regulators’ shifting views on the suitability of the product’s previous iterations have made banks, particularly smaller ones, jittery about getting into the business.”

“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, according to Bloomberg Law.

In May 2020, the OCC, FDIC, and Federal Reserve jointly released a policy statement encouraging banks to offer responsible small dollar lending products. In response to Bloomberg Law’s outreach, 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.”

But, as the story notes, regulators have repeatedly changed their position on such products, which has deterred many banks and financial institutions from developing and offering them. As one example, the CFPB issued and then later rescinded a broad no-action letter to the Bank Policy Institute. In that letter, the Bureau promised to refrain from enforcement actions if banks followed a certain model of small-dollar lending.

The Bureau also issued a no-action letter to Bank of America in November 2020, which remains in effect. Bloomberg describes Bank of America’s letter as “the bureau’s stamp of approval and a model for other banks to follow.”