Pub. 11 2020 Issue 2

www.wvbankers.org 20 West Virginia Banker By Sandra M. Murphy, Esq. and Amy J. Tawney, Esq., Bowles Rice Banks Given Green Light for Small-Dollar Loans in Response to COVID-19 F or many years, small-dollar lending has been the focus of regulatory concern and, in some cases, disapproval. The advent of the COVID-19 pandemic and resulting financial distress experienced by many Americans have prompted regulators to take a fresh look at these types of loans, and now may be the time to adopt a small lending program. On May 20, 2020, the Board of Gover- nors of the Federal Reserve Sys- tem, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency issued interagency principles “to encourage supervised banks, savings associations and credit unions to offer responsible small-dollar loans to customers for both consumer and small business purposes.” The fed- eral banking agencies recognize the important role that 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 emergen- cies or disaster recoveries.” With the U.S. unemployment rate at 14.7% in April and expected to hit 15% by the end of the second quarter, traditional banking institutions have been given the green light from federal regula- tors to provide small-dollar lending to assist customers financially impacted by the COVID-19 pandemic. The federal banking agencies issued the interagency principles follow- ing a joint statement issued by the Consumer Financial Protection Bu- reau (CFPB) and the federal banking agencies March 26 that encouraged small-dollar lending in response to the COVID-19 pandemic. In the joint statement, the CFPB and the federal banking agencies encour- aged financial institutions to make responsible small-dollar loans to both consumers and small businesses through a variety of loan structures such as open-ended lines of credit, closed-end installment loans, or ap- propriately structured single payment loans. Financial institutions were also encouraged to consider workout solutions designed to help enable the borrower to repay the principal of the loan while mitigating the need to reborrow. In the statement, the federal agencies noted that they were working on additional guidance and lending principles for responsible small-dollar loans to assist financial institutions to more effectively meet the ongoing credit needs of their communities and customers. Characteristics of Responsible Small-Dollar Loan Programs The interagency principles identify the following three characteristics of responsible small-dollar loan programs: • A high percentage of custom- ers successfully repaying their small-dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligi- bility 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 borrow- er’s financial capabilities. The interagency principles permit pro- grams that use innovative technology or processes for customers who may not meet a financial institution’s traditional underwriting standards and approves implementation of such programs in-house or through well-managed third-party relationships.