On March 26, federal regulators advised financial institutions to consider providing small-dollar loans to cash-strapped consumers during the coronavirus (“COVID-19”) pandemic. Although the guidance encouraged “responsible” lending that is “consistent with sage and sound banking practices and applicable laws, including consumer protection laws,” the joint-agency statement has been criticized by some consumer advocates, who say that the guidance opens the door to predatory lending.
In a statement, the Board of Governors of the Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau (collectively, “the Agencies”), recognized “the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income shortfalls during periods of economic stress or disaster recoveries.” Given that “federally supervised financial institutions are well-suited to meet the credit needs of customers affected by the current COVID-19 emergency,” the Agencies encouraged those institutions to offer customers responsible small-dollar loans.
“The current regulatory framework allows financial institutions to make responsible small-dollar loans,” the Agencies noted. “Such loans can be offered through a variety of loan structures that may include, for example, open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.”
The Agencies’ statement drew immediate criticism from the National Consumer Law Center, Leadership Conference on Civil and Human Rights, National Association for the Advancement of Colored People, Center for Responsible Lending, Americans for Financial Reform, and the Consumer Federation of America, which released a joint statement arguing that the Agencies’ statement “opened the door for banks to exploit people, rather than to help them.”
The Agencies attempted to address this type of criticism by acknowledging that some borrowers will experience unexpected circumstances that will prevent them from repaying their loans as structured. In such instances, the Agencies encouraged financial institutions “to consider workout strategies designed to help enable the borrower to repay the principal of the loan while mitigating the need to reborrow.”
The Agencies closed their statement by noting that they are “working on future guidance and lending principles for responsible small-dollar loans to facilitate the ability of financial institutions to more effectively meet the ongoing credit needs of communities and customers.”