Federal guidance urging banks to offer small loans is ambiguous, consumer group says

The Office of the Comptroller of the Currency issued new guidance Tuesday for national banks that want to make small loans to low-income borrowers. The guidance includes several principles the comptroller expects banks to follow in making loans of between $300 to $5,000 for more than 45 days.

“This ambiguous guidance includes some laudable consumer protection principles, but the devil will be in the details,” said Christopher Peterson, financial services director at the Consumer Federation of America. “If the OCC does not back up this policy with an aggressive supervision and enforcement program, some greedy banks will try to develop abusive products.”

Peterson said areas of concern in the OCC’s new policy include:

• The guidance doesn’t include any limit on interest rates or fees. Although the guidance requires banks to comply with “applicable” state laws, federal banking law preempts state interest rate caps. Instead, the guidance requires banks to only offer products that have “reasonable pricing.” Most Americans believe loans with interest rates above 36 percent are unreasonable. OCC examiners need to insist that banks not offer installment loans with annual percentage rates in excess of those supported by the American public. OCC examiners should use the 36 percent rate in the federal Military Lending Act and the Department of Defense’s regulations as a benchmark for determining reasonable pricing.

• The guidance has an ambiguous commitment to ensuring borrowers have the ability to repay their debts. Some small loans trap borrowers in a high-interest rate cycle where they can only afford interest payments without paying off the loan’s balance. OCC examiners need to insist that banks use underwriting that proves borrowers can quickly repay their bank installment loans without failing to pay existing expenses such as rent, car payments, and child care.

• The guidance doesn’t guarantee borrowers a day in court if their bank takes advantage of them. The OCC’s guidance doesn’t provide a remedy for borrowers to hold banks accountable if they fail to live up to the principles. Last year, the OCC opposed reforms of forced arbitration clauses and class action waivers in bank products. The OCC is encouraging installment loans to risky subprime borrowers without guaranteeing that those borrowers have access to class-wide representation or a day in court.

“The OCC’s new policy on installment lending is risky,” said Peterson. “Although the policy has some general principles on consumer protection, it remains unclear whether the government will have the will power to stop banks that try to develop predatory products.”

“In the long term, the public should insist that Congress pass a no-nonsense national usury limit based on the Military Lending Act and repeal the Federal Arbitration Act that currently bars the courthouse doors for ordinary Americans,” he said.