Last month, the Office of the Comptroller of the Currency (OCC) issued a guidance that encouraged banks to jump into the small-dollar lending market. The guidance also expressed support for practices that help consumers; including emphasizing reasonable pricing, stressing that banks ensure borrowers have an ability to repay the loans, and warning of the danger of trapping consumers in cycles of debt.
In a recent statement, the National Consumer Law Center (NCLC) called the attention put on aspects that help consumers appropriate. NCLC also applauded the OCC’s opposition to the practice of payday lenders renting bank charters to get around state usury laws, which typically apply to non-bank lenders but not to banks. A statement recently put out by the Center for Responsible Lending (CRL) also noted these important aspects of the OCC guidance bulletin. Both CRL and NCLC also went on to note that the guidance didn’t go far enough, however, and argued that small-dollar loans should not have interest rates that exceed 36% APR, or the even lower rate caps in some states. The guidance made no mention of placing a cap on small-dollar loan interest rates.
The Consumer Federation of America (CFA) offered their strong concerns to the guidance in their statement. CFA began by saying that the bulletin was ambiguous. They were happy with the mention of consumer protection, but they expressed concern over the lack of incentive to offer loans that would be consumer-friendly. Christopher Peterson, Financial Services Director at CFA, explained that “the OCC does not back up this policy with an aggressive supervision and enforcement program”. CFA also had concerns that the guidance did not give consumers an avenue to file grievances if they were taken advantage of by borrowers.
The OCC’s encouragement of banks to get into the small-dollar lending market seems to a way to get consumers better options. But the newly issued guidance does little to assure consumers that they won’t be taken advantage of. It may outline a need to protect consumers, but the language in the bulletin is vague. The guidance also fails to outline consequences for abusive lenders and provide an outlet for consumers who have been mistreated. Adding banks to the small-dollar lending market could create better options for consumers, especially if the banks adhere to the principles laid out in the new OCC guidance. But the lack of an enforcement mechanism in the guidance could mean that banks develop bad products and become like payday lenders. If the devil is in the details, this would be a case where the devil is in the lack of details.