In the aftermath of a statement from the CFPB and the four federal banking agencies encouraging small-dollar lending in response to the COVID-19 pandemic and guidance from the four federal banking agencies on “Interagency Lending Principles for Offering Responsible Small-Dollar Loans,” the CFPB has issued a “No-Action Letter (NAL) Template” for small-dollar loan products (SDT) offered by insured depository institutions or credit unions subject to the Bureau’s supervisory and enforcement jurisdiction (i.e., entities with more than $10 billion in total assets) and affiliates of such entities that are themselves insured depository institutions or credit unions. The SDT was issued in response to an application from the Bank Policy Institute, which described itself in the application as “a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers.”
In its revised NAL Policy issued in September 2019, the Bureau included a procedure allowing a third party such as a trade association to apply for a “template” NAL. Entities can use a template to apply for an NAL under substantially the same terms as those contemplated in the template, and each application under a template is subject to review by the Bureau on an individual basis.
The SDT contemplates that institutions will design their own versions of a small-dollar loan product that includes the “guardrails” set forth in the SDT. Under the SDT, an NAL applicant would have to certify that its small-dollar loan product:
- Is offered and provided only to consumers who hold deposit accounts at the institution
- Does not exceed $2500
- Is structured as either:
- An installment loan with a repayment term that is more than 45 days and less than one year and with payments amortized on a straight-line basis across more than one payment.
- An open-end line of credit linked to the customer’s deposit account (but not accessible by credit card), with a repayment term for each draw of more than 45 days and less than one year, and with payments for each draw amortized on a straight-line basis across more than one payment. However, a structure with a repayment term of 45 days or less and a single payment is permitted where a draw is no more than 10 percent of the maximum dollar amount established for the product.
- No required payment is more than twice as large as any other required payment.
- No rollovers are permitted, a borrower cannot receive a new loan or draw to repay an outstanding balance associated with a prior loan or draw, and a borrower with an existing loan or draw cannot receive a new loan or draw until the existing loan or draw is fully repaid
- “Cash flow” underwriting is used based on the consumer’s transaction activity in his or her accounts with the institution
- No late payment fees or prepayment penalties are charged
- Funds are disbursed into the consumer’s deposit account with the institution within 3 to 5 business days after approval
- Meets all applicable federal and state requirements for disclosures and marketing materials
- Is serviced by the institution and not a third party
In addition to certifying that its product satisfies the “guardrails,” an institution applying for an NAL under the SDT must provide specific information about its individual version of the small-dollar loan product that is the subject of the application. The specific product information that an NAL applicant would need to provide includes:
- The anticipated APR range, with a description of how the range is calculated (including any fees and costs included in the calculation) and a description of how the APR range, combined with other terms and conditions, “would improve the options available for consumers within the market for small-dollar credit products.” (Based on the Bank Policy institute’s application, this would appear to refer to how the institution’s APR range compares to those on payday loans offered by non-bank lenders.)
- Fees other than those included in the APR, with a description of how such fees, combined with other terms and conditions, “would improve the options available for consumers within the market for small-dollar credit products.”
- A description of how the institution intends to mitigate reborrowing risk
- A description of underwriting criteria, including the extent to which underwriting is streamlined related to other identified underwriting processes
- A description of marketing plans
- A description of the application process, including the extent to which the process is streamlined related to other application processes
- A description of any information the institution intends to provide to credit reporting agencies
The SDT also lists elements that would be included in an NAL issued by the Bureau in response to an application based on the SDT. One such element is a statement that unless or until the NAL is terminated by the Bureau, the Bureau will not make supervisory findings or bring a supervisory enforcement action against the institution under its UDAAP authority predicated on the institution’s offering or providing the described aspects of the institution’s product set forth in its NAL application.