This morning the Office of the Comptroller of the Currency (OCC) issued a new guidance bulletin for national banks that choose to make small dollar installment loans to credit impaired borrowers. The guidance bulletin includes several “core lending principles” the Comptroller expects banks to follow in making loans of between $300 to $5,000 with durations longer than 45 days.

“This ambiguous guidance includes some laudable consumer protection principles, but the devil will be in the details,” explained Christopher Peterson, Financial Services Director at 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.”

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

• The guidance does not include any explicit 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.” A super majority of Americans believe loans with interest rates above 36 percent are unreasonable. OCC examiners must insist that banks protect their reputations by refraining from offering installment loans with effective 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 implementing regulations as benchmark for determining reasonable pricing.
• The guidance has an ambiguous commitment to ensuring borrowers have the ability-to-repay their debts. Some credit products trap borrowers in a high-interest rate cycle where they can only afford interest payments without retiring the loan’s principal balance. OCC examiners must insist that banks use underwriting that proves borrowers can quickly repay their bank installment loans without defaulting on other existing obligations like rent, car payments, and child care.
• The guidance does not guarantee borrowers a day in court if their bank takes advantage of them. The OCC’s bulletin does not provide a remedy for borrowers to hold banks accountable if they fail to live up to these principles. Last year, the OCC opposed desperately needed reform of forced arbitration clauses and class action waivers in bank products. Today 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.”

Contact: Christopher Peterson, 202-387-6121ext. 1020; cpeterson@consumerfed.org

The Consumer Federation of America is an association of more than 250 nonprofit consumer groups that was established in 1968 to advance the consumer interest through research, advocacy and education.

Christopher L. Peterson is the Financial Services Director of the Consumer Federation of America and the John J. Flynn Endowed Professor of Law at the University of Utah’s S.J. Quinney College of Law.