Pew: Bank Regulators' Guidance A Move in the Right Direction, but Carries Risks

While decision encourages affordable small loans, it may also lead to unsafe products

Bank Regulators' Guidance A Move in the Right Direction, but Carries Risks

WASHINGTON—The Pew Charitable Trusts today praised parts of the new guidance from the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) for banks and credit unions to offer affordable small-dollar installment loans—but warned that it does not do enough to protect the millions of struggling Americans who otherwise turn to high-cost credit such as payday or vehicle title loans.

Pew noted that the regulators’ position outlined today provides clarity for more banks to offer small-dollar installment loans or lines of credit at scale if they meet strong consumer protection standards. But Pew also expressed concern that the FDIC’s additional move to rescind prior guidance—which warned against harmful single payment loans—could open the door for some banks to issue deposit advance loans with three-digit annual percentage rates (APRs).

Based on extensive research and numerous conversations with regulators and bankers, Pew has recommended standards for new, scalable, and consumer-friendly small installment loans from banks. Following a 2018 bulletin from the OCC, safe and affordable credit—created in accordance with Pew’s standards—began to flourish within the banking system.

Alex Horowitz, senior research officer with Pew’s consumer finance project, said of the regulators’ joint guidance:

“The good news is that today’s announcement paves the way for banks to offer safe and affordable small installment loans and lines of credit at scale.

“The bad news is that the bank regulators’ action puts millions of consumers at risk of financial harm by rescinding guidance that warned against balloon payment deposit advance loans. Regulators must clearly prohibit deposit advance products, and banks should not expose consumers to balloon payment loans.

“So now banks have a critical choice to make. Today’s action makes it easier for banks to do right by their consumers and offer affordable small installment loans. But it also makes banks responsible for rejecting deposit advances, three-digit APRs, and partnerships with payday lenders.

“If banks begin offering affordable small installment loans in line with the strong safety standards recommended by Pew, millions of borrowers will remain in the banking system and save billions of dollars in interest and fees every year.”

More information on the regulatory landscape for small-dollar loans is available at pewtrusts.org/small-loans.

The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at pewtrusts.org.