Pub. 11 2020 Issue 2

Pub. 11 2020 I Issue 2 21 West Virginia Banker Core Lending Principles The interagency principles identify the following “core lend- ing” principles for financial institutions that offer small-dollar loan products: • Loan products are consistent with safe and sound bank- ing, treat customers fairly, and comply with applicable laws and regulations; • Financial institutions effectively manage the risks associat- ed with the products they offer, including credit, opera- tional and compliance; and • Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing and repayment requirements. The interagency principles warn of the risks associated with offering small-dollar loans and note the importance of lending policies and risk management practices to support a financial institution’s ability to identify, monitor, manage and control such risks. The federal agencies indicate that such risk may be managed through new product development proto- cols that address, among other things, “the clear disclosure 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.” Areas to be Addressed in Loan Policies and Risk Management Practices and Controls The interagency principles identify the following items that loan policies and risk management practices and controls should address in connection with a small-dollar lending program: • Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that promote fair treatment and credit access of applications. Product structures, including shorter-term single payment structures, should support borrower affordability and successful repayment of principal and interest and fees over a reasonable time frame rather than reborrowing, rollovers or immediate collectability upon default. • Loan pricing. Loan pricing that complies with applicable state and federal laws and reflects overall returns rea- sonably related to the financial institution’s product risks and costs. The interagency principles do not include any specific caps on interest or fees. • Loan underwriting. Underwriting should use internal and/ or external data sources, such as deposit account activity, and new processes, technologies and automation to reduce the cost of providing small-dollar loans. • Loan marketing and disclosures. Marketing and customer disclosures must comply with consumer protection laws and regulations and provide information in a clear, con- spicuous, accurate and customer-friendly manner. • Loan servicing and safeguards. Programs should include processes that assist customers in achieving successful repayment while avoiding continuous cycles of debt and credit costs due to rollover or reborrowing, including timely and reasonable workout strategies for customers who experience distress or unexpected circumstances affecting their ability to pay. Such processes may also include restructuring single payment loans or open-end lines of credit into installment loan structures. Review of Proposed Small-Loan Programs The interagency principles note that financial institutions may, but are not required to, discuss plans for small-dollar loan products with their supervising regulators before implementation, particu- larly if the products constitute “substantial deviations” from their existing business plans. In addition, May 22, 2020, the CFPB issued a No-Action Letter (NAL) template, requested by the Bank Policy Institute, that financial institutions regulated by the CFPB can use to apply for an NAL covering their small-dollar loan products. The NAL template includes protections for consumers who seek small-dollar loan products. Last year the CFPB introduced a NAL policy that includes a provision regarding NAL templates, which permits applicants to secure a template that can serve as the foundation for NAL applications from companies that provide consumer financial products and services. A financial institution that obtains a NAL for its small-dollar loan products will have increased security that the CFPB will not bring a supervisory or enforcement action against it in connection with the products. Financial institutions not regulated by the CFPB could avoid later regulatory questions or criticism by designing such programs consistent with the guardrails, features and practices set forth in the NAL applications and corresponding letters issued by the CFPB, both of which are published on the CFPB website. Financial institutions should also take into account applicable state consumer laws and, when possible, discuss their proposed loan programs with their federal and state regulators during the development stage of their small-dollar lending program.  1 See, Interagency Lending Principles for Offering Responsible Small-Dollar Loans, May 2020, https://www.fdic.gov/news/news/press/2020/pr20061a. pdf. The interagency principles replace the OCC bulletin issued in May 2018, setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks and federal savings banks and prior guidance issued by the FDIC in 2007 (FIL-50-2007) and in 2013 (PR-105-2013), all of which have been rescinded. 2 See, Joint Statement Encouraging Responsible Small-Dollar Lending to Consumers and Small Businesses in Response to COVID-19, March 26 2020, https://www.fdic.gov/news/news/press/2020/pr20039a.pdf. 3 https://files.consumerfinance.gov/f/documents/cfpb_bpi_no-action-letter- request.pdf 4 https://files.consumerfinance.gov/f/documents/cfpb_bpi_no-action-letter.pdf Sandra M. Murphy focuses her practice on acquisition, regulatory, enforcement, corporate governance and securities law matters for banks and other financial institutions. Admitted to practice in West Virginia and Virginia, she leads the Bowles Rice Banking and Financial Services team. She can be reached at (304) 347-1131 or by email at smurphy@bowlesrice.com . Amy J. Tawney focuses her practice on banking law, mergers and acquisitions, securities law and regulatory matters. She is also admitted to practice in West Virginia and Virginia. Contact Amy by phone at (304) 347-1123 or by email at atawney@bowlesrice.com .