To encourage depository institutions to engage in responsible small-dollar lending, federal financial regulators on May 20 issued long-awaited joint guidance for offering these types of loans to consumers and small businesses.
“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 noted. They added that these programs should be developed in accordance with sound risk management principles.
When making small-dollar loans, the agencies said that lenders may underwrite loans using internal or external data sources, such as deposit account activity, to assess a customer’s creditworthiness, effectively manage risk, and lower the cost of providing responsible small-dollar loans.
Lenders also should ensure that they comply with all applicable laws and regulations, including fair lending laws, the agencies said. Other core lending principles include effectively managing the risks associated with the products offered and underwriting small-dollar products based on prudent policies and practices. These policies and practices should generally address loan structures, pricing, underwriting, marketing and disclosures, along with servicing and safeguards for customers who may find themselves experiencing stress or unexpected circumstances.
The guidance was issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency.
Read the joint principles.
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