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Federal Banking Agencies Encourage Small-Dollar Lending



No, your eyes aren’t deceiving you. On Thursday, March 26, 2020, the federal banking agencies (i.e., the FDIC, CFPB, FRB, NCUA, and OCC) issued a joint statement encouraging banks and credit unions to offer responsible small-dollar loans to consumers and small businesses affected by COVID-19. Many of us might remember the days of “Operation Chokepoint” in the 2010s (where small-dollar payday lenders were allegedly targeted), but those days are long gone. At least for now, the regulators recognize the importance of “responsible” small-dollar lending (by their supervised financial institutions) in response to the COVID-19 emergency.

The banking agencies acknowledge that COVID-19 has caused significant disruptions in the lives of consumers and small businesses, including cash-flow imbalances, unexpected expenses, and income shortfalls. In their joint statement, the regulators encourage financial institutions to offer small-dollar loans to help meet the credit needs of these affected customers. The regulators note that lenders could offer these loans in many forms, including open-end lines of credit, closed-end installment loans, or single payment loans. Financial institutions are also encouraged to think about workout strategies that enable distressed borrowers to repay the principal of their loans while mitigating the need to re-borrow.

As always, the regulators reiterate that these loans must be made in a safe and sound manner and in compliance with applicable law, including all consumer protection laws. However, over the past decade many community banks have chosen simply not to offer loans to consumers due to their enormous compliance costs, along with what many believe is a tendency by the regulators to allege and come down harsh on consumer compliance issues. Ironically, these same community banks would likely be in a strong position to otherwise meet the credit needs of the consumers and small businesses affected by COVID-19. We suspect that many credit unions will continue fulfilling these (increased) consumer needs, whereas both banks and credit unions are certainly already working with their distressed small business customers.

The joint statement adds to the rapidly changing legal environment, including most notably the federal stimulus package (i.e., the “CARES Act,” summarized by Steve Miller here). It also comes on the heels of a pair of releases from several federal banking regulators, one issued on March 9 and the other issued on March 19. In the latter, the regulators clarified that, for purposes of the Community Reinvestment Act, they would look favorably on financial institutions that engage in retail banking and lending activities aimed at meeting the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19.

Through all of these swirling changes, the legislature and federal banking regulators are hammering the importance of working with distressed borrowers affected by COVID-19. Although the joint statement described above likely won’t cause any financial institutions to make any major changes to their product lines, it might further encourage those institutions to make atypical (but beneficial) accommodations for their distressed borrowers, and to make prudent exceptions to their normal underwriting criteria in light of the COVID-19 emergency (so long as it is done in a safe and sound manner).

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