The Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, and the Office of the Comptroller
of the Currency (collectively, “the agencies”) are issuing these principles
to encourage supervised banks, savings associations, and credit unions
(collectively, “financial institutions”
1) to
offer responsible small-dollar loans to customers for both consumer
and small business purposes. The agencies recognize the important
role that responsibly offered small-dollar loans can play in helping
customers meet their ongoing needs for credit due to temporary cash-flow
imbalances, unexpected expenses, or income shortfalls, including during
periods of economic stress, national emergencies, or disaster recoveries.
Well-designed small-dollar lending programs can result in successful
repayment outcomes that facilitate a customer’s ability to demonstrate
positive credit behavior and transition into additional financial
products. The agencies offer these principles due to the evolving
conditions and products in the small-dollar loan markets over the
last several years.
The current regulatory framework allows financial institutions
to offer responsible small-dollar loans. The agencies recognize that
financial institutions are well-suited to meet these credit needs
and some already offer these products, consistent with safe and sound
principles and subject to applicable laws and regulations.
2 These
lending principles cover a variety of small-dollar loan structures
that may include open-end lines of credit with applicable minimum
payments or closed-end loans with appropriate shorter-term single
payment or longer-term installment payment structures.
3Responsible 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.
Financial institutions seeking to develop new programs
or expand existing responsible small-dollar lending programs should
do so in a manner consistent with sound risk-management principles,
inclusive of appropriate policies.
4 Well-managed programs will generally align with the financial
institution’s overall business plans and strategies. Programs could
include effectively managed deployment of innovative technology or
processes for customers who may not meet a financial institu
tion’s
traditional underwriting standards.
5 Such programs can be implemented in-house or through
effectively managed third-party relationships.
6 In all programs, responsible lending products are offered in
a manner that ensures fair access to financial services, fair treatment
of customers, and compliance with applicable laws and regulations,
including fair lending and consumer protection laws.
The agencies encourage financial institutions
to refer to the core lending principles below when implementing reasonable
policies and risk-management practices for responsible small-dollar
lending activities. Financial institutions may, but are not required
to, discuss plans for small-dollar loan products with their supervisors
before implementation, particularly if the offerings constitute substantial
deviations from their existing business plans.
Core Lending Principles The agencies believe that financial institutions can offer
small-dollar loans safely and responsibly. Some financial institutions
already offer a variety of small-dollar loan products on an open-end
line of credit or closed-end basis with various minimum payments,
installment payments, and maturities.
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.
- Loan products are underwritten based on prudent policies
and practices governing the amounts borrowed, frequency of borrowing,
and repayment requirements.
Prudent lending policies and sound risk-management practices
together support a financial institution’s ability to identify, monitor,
manage, and control the risks inherent in its lending activities,
including responsible small-dollar lending programs. As noted above,
there are several associated risks to be managed in the offering of
loan products. Effective management of such risks may include new
product development protocols that address, among other issues, the
clear disclosures of terms, the risk profile of customers using the
products, the use of new technologies, the use of alternative underwriting
information, or the use of third-party arrangements.
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, including shorter-term single payment 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. Any
products offered through effectively managed third-party relationships
would also reflect the core lending principles, including returns
reasonably related to the financial institution’s 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.7 Such analysis may facilitate sound underwriting
for credit offered to non-mainstream customers or customers temporarily
impacted by natural disasters, national emergencies, or economic downturns.
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. Applicable laws and regulations may
include but are not limited to the Equal Credit Opportunity Act, the
Truth in Lending Act, section 5 of the Federal Trade Commission Act,
which prohibits unfair or deceptive acts and practices, and section
1036 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, which prohibits unfair, deceptive, or abusive acts and practices.
- 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.
Issued jointly by the Board of Governors
of the Federal Reserve System, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, and the Office of the Comptroller
of the Currency May 20, 2020 (SR-20-14).
