The CFPB has issued a no-action letter (NAL) to a bank to facilitate the bank’s ability to offer a small-dollar loan product.
In May 2020, the CFPB issued a No-Action Letter Template for small-dollar loan products (Template) 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 Template was issued in response to an application from the Bank Policy Institute.
The Bank Policy Institute’s application was made pursuant to a procedure set forth in the Bureau’s revised NAL Policy issued in September 2019 that allows a third party such as a trade association to apply for a “template” NAL that individual companies could use to apply for an NAL under substantially the same terms as those contemplated by the template. The Template issued to the Bank Policy Institute contemplated that banks and credit unions would design their own versions of a small-dollar loan product that included the “guardrails” set forth in the Template. It required an NAL applicant 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 satisfied the “guardrails,” a bank or credit union applying for an NAL under the Template had to provide specific information about the particular product that was the subject of the application, such as the anticipated APR range and any fees other than those included in the APR.
As described in the bank’s NAL application, the small-dollar loan product approved by the Bureau is designed for the bank’s checking account customers. It is structured as a fixed term, amortizing small-dollar installment loan to be repaid in fixed minimum payments over the loan term. Other key features of the loan product include the following:
- It is offered in increments of $100 up to $500.
- A $5 flat fee is charged regardless of the amount borrowed. No other fees will be charged.
- The APR across the anticipated loan term will not exceed 36%.
- No collateral or other security will be required but the bank will retain a right of setoff
- The repayment term is 3 months, with the first payment generally due 30 days after the loan funds are deposited in the consumer’s deposit account with the bank.
- Payments are amortized on a straight-line basis across more than one payment.
- If a customer attempts to make a payment from his or her checking or savings account with the bank but does not have sufficient funds (or in any applicable overdraft protection plan) to make the payment, the bank will waive the overdraft or NSF/returned item fee that is incurred for the payment or attempted payment.
- The customer’s overdraft setting on the account into which the loan funds are deposited is set to “decline all” as a condition of obtaining the loan. With this setting, if the account lacks sufficient available funds (or in any applicable overdraft protection plan) to cover a transaction (other than a payment or attempted payment on the loan), the transaction will be returned unpaid and an NSF/returned item fee may be charged.
As contemplated by the Template, the NAL issued to the bank includes the statement that unless or until the NAL is terminated by the Bureau pursuant to its NAL Policy, the Bureau will not make supervisory findings or bring a supervisory enforcement action against the bank institution under its UDAAP authority predicated on the bank’s offering or providing the aspects of the product detailed in the bank’s NAL application.