View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
National Credit Union Administration
Office of the Comptroller of the Currency
Interagency Lending Principles for Offering Responsible Small-Dollar Loans
May 2020
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the Office of the Comptroller of the
Currency (collectively, “the agencies”) are issuing these principles to encourage supervised
banks, savings associations, and credit unions (collectively, “financial institutions” 1) to offer
responsible small-dollar loans to customers for both consumer and small business purposes. The
agencies recognize the important role that responsibly offered small-dollar loans can play in
helping customers meet their ongoing needs for credit due to temporary cash-flow imbalances,
unexpected expenses, or income shortfalls, including during periods of economic stress, national
emergencies, or disaster recoveries. 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 offer these principles
due to the evolving conditions and products in the small-dollar loan markets over the last several
years.
The current regulatory framework allows financial institutions to offer responsible small-dollar
loans. The agencies recognize that financial institutions are well-suited to meet these credit
needs and some already offer these products, consistent with safe and sound principles and
subject to applicable laws and regulations. 2 These lending principles cover a variety of smalldollar loan structures that may include open-end lines of credit with applicable minimum
payments or closed-end loans with appropriate shorter-term single payment or longer-term
installment payment structures.3
Responsible small-dollar loan programs generally reflect the following characteristics:
•

A high percentage of customers successfully repaying their small dollar loans in
accordance with original loan terms, which is a key indicator of affordability, eligibility,
and appropriate underwriting;

These principles do not apply to financial institution affiliated non-bank lenders or other non-bank lenders. These
principles could apply to U.S. branches and agencies of foreign banks.
1

2
See, e.g., Interagency Guidelines Establishing Standards for Safety and Soundness at 12 CFR 208, Appendix D-1
(Federal Reserve); 12 CFR 364, Appendix A (FDIC); and 12 CFR 30, Appendix A (OCC). Credit unions are
subject to safety and soundness requirements under the Federal Credit Union Act and the NCUA’s regulations. See,
e.g., 12 U.S.C. 1786(b), (e); 12 CFR 741.3.
3

These principles do not address financial institution overdraft programs or credit cards.

Page 1 of 4

•
•

Repayment terms, pricing, and safeguards that minimize adverse customer outcomes,
including cycles of debt due to rollovers or reborrowing; and
Repayment outcomes and program structures that enhance a borrower’s financial
capabilities.

Financial institutions seeking to develop new programs or expand existing responsible smalldollar lending programs should do so in a manner consistent with sound risk management
principles, inclusive of appropriate policies. 4 Well-managed programs will generally align with
the financial institution’s overall business plans and strategies. Programs could include
effectively managed deployment of innovative technology or processes for customers who may
not meet a financial institution’s traditional underwriting standards. 5 Such programs can be
implemented in-house or through effectively managed third-party relationships. 6 In all
programs, responsible lending products are offered in a manner that ensures fair access to
financial services, fair treatment of customers, and compliance with applicable laws and
regulations, including fair lending and consumer protection laws.
The agencies encourage financial institutions to refer to the core lending principles below when
implementing reasonable policies and risk management practices for responsible small-dollar
lending activities. Financial institutions may, but are not required to, discuss plans for smalldollar loan products with their supervisors before implementation, particularly if the offerings
constitute substantial deviations from their existing business plans.
Core Lending Principles
The agencies believe that financial institutions can offer small-dollar loans safely and
responsibly. Some financial institutions already offer a variety of small-dollar loan products on
For Federal Reserve: SR letter 95-51, “Rating the Adequacy of Risk Management Processes and Internal Controls
at State Member Banks and Bank Holding Companies,” and SR 16-11, “Supervisory Guidance for Assessing Risk
Management at Supervised Institutions with Total Consolidated Assets Less than $50 Billion.” Note as of June 8,
2016: See SR letter 16-11 for supervisory guidance on assessing risk management practices at state member banks,
bank holding companies, and savings and loan holding companies (including insurance and commercial savings and
loan holding companies) with less than $50 billion in total consolidated assets, and foreign banking organizations
with consolidated U.S. assets of less than $50 billion. SR letter 95-51 remains applicable to state member banks and
bank holding companies with $50 billion or more in total assets until superseding guidance is issued for these
institutions. For FDIC: FDIC’s Risk Management Manual of Examination Policies, Section 3.2 (Loans). For
NCUA: Federal credit unions offering PALs small-dollar loans under 12 CFR 701.21(c)(7)(iii) and (iv) must follow
the specified regulatory framework for those loan programs. For OCC: OCC Bulletin 2017-43, “New, Modified, or
Expanded Bank Products and Services: Risk Management Principles.”

4

Refer to Interagency Statement on the Use of Alternative Data in Credit Underwriting (December 3, 2019).
FIL-82-2019 (December 13, 2019)

5

For Federal Reserve: SR letter 13-19/CA 13-21, “Guidance on Managing Outsourcing Risk.” For FDIC: Financial
Institution Letter (FIL) 44-2008, “Third-Party Risk: Guidance for Managing Third-Party Risk” dated June 6, 2008.
For NCUA: NCUA Letter to Credit Unions 07-CU-13, “Evaluating Third Party Relationships” (December 2007)
and NCUA Supervisory Letter 07-01, “Evaluating Third Party Relationships” (October 2007). For OCC: OCC
Bulletin 2013-29, “Third-Party Relationships; Risk Management Guidance,” dated October 30, 2013. Also see
OCC Bulletin 2020-10, “Third-Party Relationships: Frequently Asked Questions to Supplement OCC Bulletin 201329,” dated March 5, 2020.
6

Page 2 of 4

an open-end line of credit or closed-end basis with various minimum payments, installment
payments, and maturities.
The agencies’ core lending principles for financial institutions that offer small-dollar loan
products include:
•
•
•

Loan products are consistent with safe and sound banking, treat customers fairly, and
comply with applicable laws and regulations.
Financial institutions effectively manage the risks associated with the products they offer,
including credit, operational, and compliance.
Loan products are underwritten based on prudent policies and practices governing the
amounts borrowed, frequency of borrowing, and repayment requirements.

Prudent lending policies and sound risk management practices together support a financial
institution’s ability to identify, monitor, manage, and control the risks inherent in its lending
activities, including responsible small-dollar lending programs. As noted above, there are
several associated risks to be managed in the offering of loan products. Effective management of
such risks may include new product development protocols that address, among other issues, the
clear disclosures of terms, the risk profile of customers using the products, the use of new
technologies, the use of alternative underwriting information, or the use of third-party
arrangements.
Reasonable loan policies and sound risk management practices and controls for responsible
small-dollar lending would generally address the following:

7

•

Loan structures: Loan amounts and repayment terms that align with eligibility and
underwriting criteria and that promote fair treatment and credit access of applicants, and
product structures, including shorter-term single payment structures, that support
borrower affordability and successful repayment of principal and interest/fees in a
reasonable time frame rather than reborrowing, rollovers, or immediate collectability in
the event of default.

•

Loan pricing: Loan pricing that complies with applicable state and federal laws and
reflects overall returns reasonably related to the financial institution’s product risks and
costs. Any products offered through effectively managed third-party relationships would
also reflect the core lending principles, including returns reasonably related to the
financial institution’s risks and costs.

•

Loan underwriting: Analysis that uses internal and/or external data sources, such as
deposit account activity, to assess a customer’s creditworthiness and to effectively
manage credit risk. 7 Such analysis may facilitate sound underwriting for credit offered to
non-mainstream customers or customers temporarily impacted by natural disasters,
national emergencies, or economic downturns. Underwriting can also use effectively

Supra, note 5.

Page 3 of 4

managed new processes, technologies, and automation to lower the cost of providing
responsible small-dollar loans.
•

Loan marketing and disclosures: Marketing and customer disclosures that comply
with consumer protection laws and regulations and provide information in a clear,
conspicuous, accurate, and customer-friendly manner. Applicable laws and regulations
may include but are not limited to the Equal Credit Opportunity Act, the Truth in Lending
Act, Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive
acts and practices, and Section 1036 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which prohibits unfair, deceptive, or abusive acts and
practices.

•

Loan servicing and safeguards: Processes that assist customers in achieving successful
repayment while avoiding continuous cycles of debt and significant credit costs due to
rollover or reborrowing. For customers who experience distress or unexpected
circumstances affecting their ability to repay small-dollar loans, such processes may
include timely and reasonable workout strategies. Such processes could also include
restructuring single payment loans or open-end lines of credit into installment loan
structures in appropriate circumstances.

Page 4 of 4


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102