NCUA, regulators share responsible small-dollar lending principles
NCUA, along with other federal financial institution regulatory agencies Wednesday issued principles for offering small-dollar loans in a responsible manner to meet financial institutions customers' short-term credit needs.
NCUA, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency “recognize the important role that responsibly offered small-dollar loans can play in helping consumers meet their ongoing needs for credit from temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, natural disasters, or other extraordinary circumstances such as the public health emergency created by COVID-19,” according to the statement released Wednesday.
According to "Interagency Lending Principles for Offering Responsible Small-Dollar Loans," responsible small-dollar loan programs generally reflect the following characteristics:
- A high percentage of customers successfully repaying their small dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligibility, and appropriate underwriting;
- Repayment terms, pricing, and safeguards that minimize adverse customer outcomes, including cycles of debt due to rollovers or reborrowing; and
- Repayment outcomes and program structures that enhance a borrower’s financial capabilities.
The agencies’ core lending principles for financial institutions that offer small-dollar loan products include:
- Loan products are consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations;
- Financial institutions effectively manage the risks associated with the products they offer, including credit, operational, and compliance; and
- Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing, and repayment requirements.
Reasonable loan policies and sound risk management practices and controls for responsible small-dollar lending would generally address the following:
- Loan structures: Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and credit access of applicants, and product structures that support borrower affordability and successful repayment of principal and interest/fees in a reasonable time frame rather than reborrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing: Loan pricing that complies with applicable state and federal laws and reflects overall returns reasonably related to the financial institution’s product risks and costs.
- Loan underwriting: Analysis that uses internal and/or external data sources, such as deposit account activity, to assess a customer’s creditworthiness and to effectively manage credit risk. Underwriting can also use effectively managed new processes, technologies, and automation to lower the cost of providing responsible small-dollar loans.
- Loan marketing and disclosures: Marketing and customer disclosures that comply with consumer protection laws and regulations and provide information in a clear, conspicuous, accurate, and customer-friendly manner.
- Loan servicing and safeguards: Processes that assist customers in achieving successful repayment while avoiding continuous cycles of debt and significant credit costs due to rollover or reborrowing. For customers who experience distress or unexpected circumstances affecting their ability to repay small-dollar loans, such processes may include timely and reasonable workout strategies. Such processes could also include restructuring single payment loans or open-end lines of credit into installment loan structures in appropriate circumstances.