Federal Regulators Issue Guidance on Responsible Small-Dollar Lending

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.

Regulators Encourage Mortgage Servicers to Work with Homeowners Affected by COVID-19

Financial regulators on April 3 issued a joint policy statement granting flexibility to mortgage servicers to work with borrowers struggling as a result of the coronavirus pandemic. Under the CARES Act, servicers are required to grant payment forbearances to impacted borrowers for up to 180 days, and possibly longer.

The agencies confirmed that these forbearance offers are exempt from certain loss mitigation procedural requirements and servicers do not need to obtain a complete application before offering CARES Act forbearance to a borrower. The agencies also said that they would not penalize servicers for failing to provide the required notice of acknowledgement to borrowers who submit incomplete applications within the five-day timeframe described in the servicing rules, provided that the notice is given before the end of the forbearance period. The agencies also said that they would not penalize servicers for failing to provide other loss mitigation notices and outreach efforts, so long as servicers demonstrate good-faith efforts to comply “within a reasonable timeframe.”

Finally, the agencies said they would not take action against servicers for delays in sending annual escrow statements, provided the servicers demonstrate good-faith efforts to comply “within a reasonable timeframe.” In addition to the statement, the CFPB offered further clarification in a set of frequently asked questions regarding compliance with the servicing rules during the COVID-19 emergency

Read more.

Agencies Encourage Banks and CUs to Engage in Responsible Small-Dollar Lending

The federal financial regulators on March 26 issued a joint statement urging financial institutions to offer “responsible small-dollar loans to both consumers and small businesses.” Such offerings should be made in accordance with safe and sound banking practices, and should ensure fair treatment of consumers and comply with applicable statutes and regulations, including consumer protection laws, the agencies said.

“The current regulatory framework allows financial institutions to make responsible small-dollar loans. Such loans can be offered through a variety of loan structures that may include, for example, open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans,” the agencies said. “For borrowers who experience unexpected circumstances and cannot repay a loan as structured, financial institutions are encouraged to consider workout strategies designed to help enable the borrower to repay the principal of the loan while mitigating the need to re-borrow.”

The agencies also signaled that they plan to issue additional guidance on small-dollar loans to help banks and credit unions continue to meet the needs of customers who may be facing extreme financial hardships.

Read the letter.

Agencies Provide Guidance on Loans Modified Due to COVID-19

Loan modifications for borrowers affected by the coronavirus pandemic will not generally be required to be treated as troubled debt restructurings (TDRs), federal financial institution agencies and state banking regulators said on March 22.

The agencies said they had confirmed with FASB staff that “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.” This includes short-term modifications like payment deferrals, fee waivers and repayment term extensions.

Meanwhile, the agencies said that examiners will “exercise judgment” in reviewing loan modifications and “not automatically adversely risk rate credits that are affected by COVID-19,” including those that are designated as TDRs.

The guidance also addresses past-due reporting, nonaccrual status, charge-offs, and the eligibility of modified loans as discount window collateral.

Read the interagency statement.

GAO: Regulators Failing to Assess Cumulative Burden of Rules on CUs and Community Banks

The Government Accountability Office (GAO) found that depository institution regulators fail to assess the cumulative burden of all rules imposed on community banks and credit unions.

The GAO conducted interviews and focus groups with over 60 representatives from community banks and credit unions regarding the most burdensome regulations.

These representatives identified regulations for reporting mortgage characteristics, reviewing transactions for potentially illicit activity, and disclosing mortgage terms and costs to consumers as the most burdensome.

GAO was told that these regulations were time-consuming and costly to comply with, in part because the requirements were complex, required individual reports that had to be reviewed for accuracy, or mandated actions within specific timeframes.

GAO made 10 recommendations to the Consumer Financial Protection Bureau (CFPB) and the four depository institution regulators.

GAO recommended that the CFPB "assess the effectiveness and guidance on mortgage disclosure regulations and publicly issue its plans for the scope and timing of its regulation reviews and coordinate these with other regulators' review process."

In addition as part of their regulatory burden reviews, the depository institution regulators should develop plans to report quantitative rationales for their actions and addressing the cumulative burden of regulations.

Read the report.