This week LenderLaw Watch covers developments related to small-dollar loans in response to the COVID-19 crisis.
Every year the Board of Governors of the Federal Reserve System (Federal Reserve) conducts its Survey of Household Economics & Decision-making, asking households across the country questions related to financial wellbeing and security. According to the May 2019 survey, around 40% of American households would have difficulty with a small financial disruption—three out of every ten respondents said they would have to borrow or sell something when faced with a hypothetical $400 unexpected expense or emergency, and 12% of survey respondents would be unable to pay the expense. This year, many Americans are facing far worse unexpected financial shortfalls than contemplated by the survey’s hypothetical.
Recognizing the financial impact the COVID-19 crisis will have on households, last month regulators issued multiple statements encouraging banks and other financial institutions to meet the financial needs of consumers affected by the pandemic, including by offering small-dollar loans.
On March 9, 2020, the Federal Reserve, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (OCC), together with the Conference of State Bank Supervisors, published a press release encouraging financial institutions to “meet financial needs of customers” affected by the coronavirus. The Federal Reserve also encouraged financial institutions to review its 2013 supervision and regulation letter, “Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency,” which advised financial institutions of specific efforts they should consider during a major disaster, including “[e]asing credit terms for new loans.”
On March 19, the Federal Reserve, FDIC, and OCC published a Joint Statement on Community Reinvestment Act Consideration for Activities in Response to COVID-19 recognizing the possible negative financial impact of COVID-19 and again encouraging financial institutions to work with consumers affected by COVID-19. The joint statement advised financial institutions that the agencies would “favorably consider” retail banking and lending activities that meet the needs of individuals with low and moderate incomes affected by the virus as long as they remain consistent with consumer protection laws, such as “[e]xpanding the availability of other short-term, unsecured credit products for creditworthy borrowers.” The joint statement emphasized that “prudent efforts to modify the terms on new or existing loans for low- and moderate-income customers, small businesses, and small farms will receive CRA consideration and not be subject to examiner criticism.”
The joint statement also clarified that since the official declaration of a national emergency, financial institutions will receive CRA consideration for community development activities such as, among other things:
- Loans, investments or services that support digital access for low- and moderate-income individuals or communities; and
- Loans, investments or services that support access to health care, particularly for low- and moderate-income individuals or communities.
The joint statement is effective through the six-month period after the national emergency declaration is lifted.
Consistent with these statements, on March 26, 2020, the Federal Reserve, CFPB, FDIC, NCUA, and OCC published another statement – Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19. The statement encourages banks, savings associations, and credit unions to offer small-dollar loans to consumers and small businesses, recognizing unexpected expenses and income shortfalls that may be experienced during the COVID-19 crisis. The joint statement observed that open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans could be offered in line with current regulations and consumer protection laws. In a footnote, the joint statement noted that financial institutions “may, but are not required to” consult with regulators about small-dollar loan products they intend to offer to consumers impacted by the pandemic.
These statements are consistent with federal agencies’ shift in recent years away from the Obama administration’s policy aimed at curtailing access to small dollar loans. See here for LenderLaw Watch’s previous coverage of the CFPB’s changing stance on payday loans and its payday lending rule.
In response to the pandemic, financial institutions have begun to take steps to meet consumers’ financial needs during the crisis, possibly as a result of this guidance. For example, U.S. Bank rolled out temporary adjustments for short-term, small dollar loans by reducing pricing on U.S. Bank Simple Loans to $6 per $100 borrowed (down from $12 for auto pay and $15 for manual pay) and reducing APR to 2.99% on U.S. Bank Personal Loans up to $4,999 for up to 48 months, and Goldman Sachs’ Marcus is allowing personal loan payment deferrals for one month with no interest charged during the deferral for borrowers impacted by COVID-19. See here for Enforcement Watch’s collection of the latest announcements by financial institutions related to COVID-19.